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:
- A Total Stock Market Index Fund.
- A Total Bond Market Index Fund.
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.
SpecificsVanguard has a history of providing quality products with low fees. Therefore, two examples of logical choices for total stock and bond market funds include:
- The Vanguard Total Stock Market ETF (Ticker: VTI).
- 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 AllocationNow 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: New to Investing
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