Finding great investments is a useful skill. If you really want to fix your finances, though, you need to find ways to take the best of all your investments and put them together into a unified whole.
Today, I wrap up this series on how you can fix your finances in just five days. Earlier in the week, you learned ways to put your debt behind you and create an emergency fund to give you a cash cushion against unforeseen expenses. Then, we turned to investing, pointing out that although mutual funds and ETFs give beginning investors an excellent first view of how the financial markets work; the big rewards are in picking the top individual stocks.
All that's left is figuring out what the right balance is between stocks, funds, and other types of investments. The right mix of different asset classes may help you protect against future losses, and at the very least, it should give your portfolio a smoother ride as it grows over the years.
Having a plan
First and foremost, you need to understand that there's no single right answer for how you should invest. Certainly, when you look at what the most famous successful investors own, you'll see that they're completely different.
Most of those superinvestors share one thing in common, though: They each follow a particular approach to investing -- one that resonates with the way they think about money. Warren Buffett and Charlie Munger, with their frugal, simple personalities, seem tailor-made for the large-cap value-investing models they're both so famous for. Others, such as George Soros, happily take risks knowing that they'll get the majority of their picks wrong -- because when they pick right, they'll be really right and produce enough profit to make up for their many smaller losses.
As you gain experience, you'll figure out your own investing strengths. In the meantime, a simple risk-reducing strategy will help you protect your money.
Build a core
Even though most mutual funds and ETFs have historically struggled to beat their benchmarks, that doesn't mean you should give up on them entirely. Funds can help you create a conservative core to your portfolio -- one that will give you the latitude to take bigger risks with the rest of your money.
As an example, here's one way to set up a core portfolio using ETFs:
Vanguard Total Stock Market ETF
(NYSE: VTI), which owns shares of not only all the household name U.S. megacap giants but also domestic mid- and small-cap stocks as well.
iShares MSCI EAFE
(NYSE: EFA), which gives you broad exposure to developed-market stocks around the world.
- A broad-based bond ETF like iShares Barclays Aggregate Bond
(NYSE: AGG), owning various types of Treasury, agency, and corporate bonds.
- A sprinkling of offerings from other asset classes, such as the Vanguard REIT Index ETF
(NYSE: VNQ)or SPDR Gold Trust (NYSE: GLD), to round out your portfolio.
As we discussed on Wednesday, how much you invest in each of those funds depends on the asset allocation you pick. But the other question is how much of your total assets to designate for this core portfolio versus how much you keep outside the core to invest more aggressively. In my view, as you get older, your core investments should make up a bigger portion of your overall portfolio, because your overall risk level should decline gradually over time.
With a solid core in place, you're free to pick higher-risk individual stocks with the rest of your money. This part of your portfolio will be more volatile, but with a chance at greater profits than you'll likely see from your core investments.
Remember, though, that even when you're looking for huge returns, you also want to follow Warren Buffett's first rule: Never lose money. As attractive as stocks like insurance giant AIG
You won't always succeed, of course. Losses will happen. But if you treat the assets outside of your core not as play money, but rather as your opportunity to earn stellar returns, then you have the right attitude.
Fix your finances forever
I hope that in this week-long series of articles, you've learned some things about your finances that will help you in the months and years to come. And remember -- no matter what your financial situation is, there are plenty of people in exactly the same boat as you are. So don't be a stranger: Come back and share your experiences with our community!
Did we miss something you'd like us to talk about? Tell us what you thought of this week-long series on fixing your finances by leaving a comment in the box below. Thanks for your input!