What kind of investor are you? In the broadest sense, there are three types of investors.
According to Morgan Housell, a writer at The Motley Fool, ten percent of investors don’t need help – they get it naturally. Ten percent of investors can’t be helped – they’re compulsive gamblers. Eighty percent both want and need good advice.
While there really is no way to know exactly what the proper percentages for these three groups would be, I suspect that 10/80/10 is probably a reasonable distribution among these three groups.
There are a small group of people who are willing to delve deeply into researching their investments and are interested enough to continually monitor their holdings. This includes reading quarterly and annual reports, understanding how to evaluate an investment and assess whether it is a good investment to buy, sell, or hold. This would be the group that gets it naturally.
At the other end of the spectrum, there are the gambler. These are the people who irrationally react to tips and hunches. They make buy and sell decisions based on very little information and little or no research. The will frequently wager, err…. invest in risky assets hoping they will hit on the next big thing. These people also tend to be reckless with their money. They might even invest with margin accounts, leveraging their “bets.” This was me in the late 1990’s. I got caught up in the dot come mania and was buying on margin and buying naked call options on high-flying companies. When the market “corrected.” the value of my portfolio received a sound thrashing. I learned my lesson. In retrospect, for a short while, I fit into this gambler category, but have long since learned my lesson… the hard way.
Those are the outlying 20 percent. Most people fit into the 80 percent. More than likely, this is where you fit in. The rest of us aren’t interested in closely monitoring our investments nor are we reckless with our hard earned dollars. Mr. Housell suggests that this majority group both wants and needs good advice.
The Rest of Us
In my opinion, all the advice that most people needs is really quite simple. Invest in index funds, regularly add money to your investments, reallocate your portfolio periodically. That’s it. Unless you are going to closely monitor your portfolio, you are probably best off investing simply in a small group of index funds. The are various approaches, but most people suggest that you should divide your money among three main areas: domestic stocks, international stocks, and bonds. You can further subdivide these areas to include small cap stocks, inflation-protected treasuries, international bonds, real estate investment trusts, etc.
Regardless of how you slice and dice your portfolio, your money should probably be invested in low cost index funds. Most every major brokerage house offers such products. Your portfolio could be as simple as two funds: an S&P 500 index fund and a bond fund.
The are various strategies for having a certain allocation for stocks and bonds. Many advisors suggest using your age as a proxy. Using the calculation of 110 minus your age would tell you have much you would have in stocks. For instance, if you are 40, you would have about 70 percent in stocks and the remaining 30 percent in bonds. (110 – 40 = 70.) Alternatively, is you 25, you would have 85 percent in stocks and just 15 percent in bonds.
As you get older, you would adjust your portfolio to make sure that your allocation is in line with your age. If a 40 year old has 70 percent in stocks, she or he would decrease that allocation to stocks to 65 percent when she turns 45. You could make this adjustment annually, semi-annually, quarterly, monthly, every five year…. whatever works for you.
Stay on Track
For the most part, that’s all there is to it. Simply invest your money in low cost index funds. Keep adding new money every single year. Stay on track. Over time, you will amass wealth. You will retire with more money than most people.