Here’s a little secret that most investment salespeople will not tell you: The actual investments you choose aren’t really that important. Buying Whole Foods or Walmart or Kroger stock is the least important financial decision you will make.
What? How can that be, you say? My adviser is an expert at picking money making investments. Maybe, but that can only last so long.
What is tried and true is to build a portfolio by first determining your Asset Allocation. Asset Allocation simply means what percentage of your money will be in different areas of the investment market (like US large company stock, International stock, Real Estate, or Bonds). A 1991 study referred to as the Brinson Study shows that 91% of investment returns are related to the Asset Allocation of the portfolio. Market timing and investment selection combined only account for less than 10% of your results.
Picking investments before you have chosen your Asset Allocation is like buying all of the tile for a new house before you’ve created a floor plan.
Choosing your asset allocation has about 70% to do with your time horizon (longer time horizon = more stocks) and 30% with your loss tolerance (how low can the portfolio go before you hit the panic button).
So, after you’ve done the hard work of choosing how much you’ll have in stocks vs. bonds, picking investments to fill in those slots is pretty easy. Look for diversified mutual funds in each area that have low costs, lower risk than their peers, and higher returns than their peers.
If this still seems like more effort than you want to put into creating your portfolio, call me and let me help you work out a plan that is right for you.
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