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by
Ramit Sethi
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March 9 - July 22, 2020
90 Years of Average Annual Returns for Stocks and Bonds
Age and risk tolerance matter. If you’re twenty-five years old and have dozens of years to grow your money, a portfolio made up of mostly stock-based funds probably makes sense. But if you’re older, retirement is coming up within a few decades and you’ll want to tamp down your risk.
Bonds act as a counterweight to stocks, generally rising when stocks fall and reducing the overall risk of your portfolio.
your portfolio will actually have better overall performance if you add bonds to the mix. Because bonds will generally perform better when stocks fall, bonds lower your risk a lot while limiting your returns only a little.
Bonds aren’t really for young people in their twenties. If you’re in your twenties or early thirties and you don’t necessarily need to reduce your risk, you can simply invest in all-stock funds and let time mitigate any risk.
But in your thirties and older, you’ll want to begin balancing your portfolio with bonds to reduce risk.
As a financial adviser once told me, “Once you’ve won the game, there’s no reason to take unnecessary risk.”
Stocks and Bonds Have Many Flavors
What a Granny Needs: Typical Asset Allocations by Age
Mutual Funds: Not Bad, Pretty Convenient, but Often Expensive and Unreliable
mutual funds, which are just baskets filled with different types of investments (usually stocks), were invented.
there are now better choices for investing: lower-cost, better-performing index funds.
Advantages of a mutual fund:
Disadvantages:
Index Funds: The Attractive Cousin in an Otherwise Unattractive Family
In 1975, John Bogle, the founder of Vanguard, introduced the world’s first index fund.
These simple funds buy stocks and match the market (more precisely, to match an “index” of the m...
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index funds are simply collections of stocks that computers manage in an effort to match the index of the market.
Advantages:
Disadvantages:
Target Date Funds: Investing the Easy Way
Target date funds are simple funds that automatically diversify your investments for you based on when you plan to retire.
Target date funds are actually “funds of funds,” or collections made up of other funds, which offer automatic diversification.
For example, a target date fund might include large-cap, mid-cap, small-cap, and international funds.
your target date fund will own many funds, all of which ow...
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By now, you should know what you want to invest in: a target date fund or index funds. If you’re even considering buying individual stocks because you think you can beat the market or it’s sexier, I want you to take all your money, put it in a big Ziploc bag and light it on fire.
If you don’t want to spend a billion years managing your money and you’re satisfied with the 85 Percent Solution of investing in a convenient fund that’s good enough and will free you up to live your life and do what you love, then go for a target date fund. If you’re more of a personal finance geek, are willing to spend some time on your investments, and want more control, then choose index funds.
A Common Investment Option: Your 401(k)
Stay away from “money market funds,” which is just another way of saying your money is sitting, uninvested, in cash.
Investing Using Your Roth IRA
The easiest investment is a target date fund. You can just buy it, set up automatic monthly contributions, and forget about it.
You’ll notice that Vanguard offers funds with names like “Target Retirement 2040,” “Target Retirement 2045,” and “Target Retirement 2050.” The main difference among these funds is how they’re allocated: The larger the number (which represents the year you’ll retire), the more equities (stocks) the fund has.
Some companies call them “target date” funds, while others call them “target retirement” or “lifecycle” funds.
So if you’re twenty-five and pretty risk averse, you can pick a fund designed for someone older, which will give you a more conservative asset allocation.
The Rule of 72
72 ÷ return rate = number of years.)
Anyway, Swensen suggests allocating your money in the following way:
30 percent—Domestic equities:
15 percent—Developed-world international equities:
5 percent—Emerging-market equities:
20 percent—Real estate investment trusts:
15 percent—Government bonds:
15 percent—Treasury inflation-protected securities:
The Swensen Model of Asset Allocation
I always start researching at the most popular companies: Vanguard, Schwab, and T. Rowe Price;
The first thing you want to do when picking index funds is to minimize fees.
Most of the index funds at Vanguard, T. Rowe Price, and Fidelity offer excellent value.
Second, you want to make sure the fund fits into your asset allocation.
Third, note that you should absolutely look at how well the fund has returned over the last ten or fifteen years, but remember that, as they say, past performance is no guarantee of future results.
Stocks (“Equities”) 30 percent—Total Market Index/equities (VTSMX) 20 percent—Total International Stock Index/equities (VGTSX) 20 percent—REIT index/equities (VGSIX) Bonds 5 percent—Short-Term Treasury Index Fund (VSBSX) 5 percent—Intermediate-Term Treasury Index Fund (VSIGX) 5 percent—Long-Term Treasury Index Fund (VLGSX) 15 percent— Short-Term Inflation-Protected Securities Index Fund (VTAPX)
