Never forget these two axioms:
Money frees us, but its pursuit may enslave us.
It’s not how much you have at the end; it’s how much you could have made.
Before we get into talking about non-index funds, let’s talk about what you’re going into before you do Consider this the look before the leap.
I’ve always maintained that if you have low risk tolerance, then put 90% of your investment dollars should be in a S&P 500 fund and 10% in short term bonds. (An alternative is always all of your investment in a S&P 500 fund. Sounds risky, right? Well, you’re betting on the future of the entire American economy—9% a year every year for over a century. It’s a pretty good bet and the best and still safest one that is commercially available.) If you have a slightly higher risk tolerance, then put 90-100% of your investments in a combination of a S&P 500 fund, mid cap fund, and a small cap fund and 0-10% in short term bonds. Add slightly more risk and add in blue chip multibillion dollar Dividend Champions to whatever your comfort level/risk tolerance is—5, 10, 20, 25%, or a higher percent of your entire investment portfolio. (Something along the lines of 25% of all your investment dollars in Dividend Champions with all dividends reinvested back into each stock, 25% in an S&P 500 fund, 25% in a md cap fund, and 25% in a small cap fund would be be a moderate risk tolerance portfolio that can garner good returns and would be appropriately aggressive enough for a young investor [ie, <40 years old}.)
If you do any of the above and slowly add bonds into your investment portfolio as you age, you’ll do perfectly well.
Just start early and steadily invest weekly, biweekly, or monthly.
The rest will take care of itself.
It always has in the past and despite short term market turmoil, there is no reason to believe it will not in the future as well.
Realize also that when you are told to increase the amount in one type of asset rather another, you don’t have to put in more money than you usually do. You just have to divert more money into the desired asset class than any other. This is where once again dividends are beautiful as they allow for ongoing purchases of stocks or funds without any extra from you. You can divert money into another asset class while the dividends keep rolling in and act as a way to increase your stake in these dividend producing assets, WIth dividends, you get to increase some assets while not necessarily losing other assets.
So where does that leave you in terms of investing?
It’s a matter of what you want in in your portfolio and what you are invested in allowing you to sleep peacefully at night. If you have doubts, invest as detailed above and be happy. However…if you want to try something beyond index funds (perhaps first as a small part of your investment portfolio and then perhaps an increasing amount over the years or decades as you feel comfortable with it and it continues to perform well), then let’s talk about other funds as investment option…next time.
I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.
Please spread the word about this blog to your friends (real and virtual), family, and colleagues. Talk to you soon.
Until next time…