(The First) Two Investments Everyone Should Own

Written by Sam on . Posted in Education, Investing, Investing for Beginners. 2683 views.

The First Two Investments Everyone Should OwnThe following is intended to be a very general financial overview and is meant to whet the appetite of potential/beginning investors.  Learning about investing in it’s simplest form is a great first step to financial independence and saving a boat-load in fees.

Any investor, whether beginner or expert, will typically own two general asset classes:  Stocks and Bonds.  The proportional mix of stocks and bonds is known as one’s Asset Allocation.    Those with less experience should keep a simple asset allocation and start off owning only two things:

  1. A Total Stock Market Index Fund.
  2. A Total Bond Market Index Fund.
To rewind a little, the first rule for beginning investors should be “Don’t own individual stocks”.  Why?  Owning an individual stock exposes you to “Individual or Diversifiable Risk” (the risk of price change due to the unique circumstances of a specific security, as opposed to the total market).  An investor can avoid the risk associated with individual companies (such as the CEO being involved in a scandal) by investing in a Total Stock Market Index Fund which owns thousands of individual companies (decreasing the risk of one company affecting the Fund price).

The same concept applies to bonds.  Novice investors will want to avoid the “Interest Rate Risk” which exists for individual bonds.  Away to avoid the individual risks of default, rate changes and other unforeseen changes is to invest in a Total Bond Market Fund which owns thousands of different duration, timing and rated bonds.

Specifics

Vanguard has a history of providing quality products with low fees.  Therefore, two examples of logical choices for total stock and bond market funds include:
  1. The Vanguard Total Stock Market ETF (Ticker: VTI).
  2. The Vanguard Total Bond Market ETF (Ticker: BND).

Both Exchange Traded Funds (ETFs) seek to replicate the returns of the total market.  This level of diversification should shield beginner investors from the sudden ups and downs associated with individual investments.

A Proper Allocation

Now that we’ve identified examples of two investments everyone should own, how much of each should you buy?  Historically, the stock market will offer higher returns than the bond market, but for a higher risk.  Therefore, portfolios with greater stock percentages are seen as more risky and less conservative than those with greater bond percentages.  Very generally, allocations of between 70% and 90% stock (with 30% to 10% of bonds) are typically recommended for younger investors who have a longer investing horizon to benefit from the increased risks.  Similarly, allocations of 70% up to 90% of bonds are typically recommended for investors who are more conservative or who are looking to withdraw their money in a shorter time period.

Remember, you’ll always want to consult your financial adviser before investing.  I’m providing general, hypothetical, information on investing and have received zero compensation to do so.  If you’re ready to move on, start with this excellent read: The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition).

Tags:

Trackback from your site.

Comments (2)

  • Brittany H Martin

    |

    Thank you, I have recently been looking for facts about this question for a while and yours is the best I have found so far.

    Reply

  • Darcel Crickenberger

    |

    Great post at (The First) Two Investments Everyone Should Own. I was checking constantly this blog and I am impressed! Extremely useful information specifically the last part :) I care for such info much. I was seeking this particular information for a long time. Thank you and best of luck.

    Reply

Leave a comment