You don't have to be good with numbers or a motivated market watcher to handle your investments. Just follow a few basic rules:
- Simple is best.
Money you intend to keep invested for 10 years or longer belongs in stocks. Yes, there are thousands to choose from, but all you need to do is put 70 percent of your money in a single broad stock index fund that buys into big U.S. companies with a global presence. The remaining 30 percent belongs in an international index fund. Sure, you can add more to the mix—but with two simple moves, you'll have a fully diversified portfolio of stocks. - Keep costs low.
To make the most of your money, I recommend sticking with mutual funds that don't charge a commission when you buy or sell. Another important cost is the annual expense ratio that all funds levy on shareholders. Look for funds that have expense ratios below 1 percent. If you can handle the $3,000 minimum initial investment, I like the low-cost Vanguard Total Stock Market Index Fund and the Vanguard Total International Stock Index Fund (vanguard.com; 877-662-7447). Another good option is the T. Rowe Price family of funds; you can start with as little as $50 a month (troweprice.com; 800-541-6066). - Contribute consistently.
The key to making money is to stay invested. People often panic when the markets go down and sell off their stocks—but then they aren't in the game when the markets are doing well. The best decision you'll ever make is to commit to a steady investment program. No matter what the markets are doing, keep funding your investments. This is called dollar-cost averaging. That's what you do with a 401(k) or 403(b); you regularly add money every few weeks. Sometimes your money will buy fewer shares (when the market is higher), and sometimes it will buy more shares (when the market is lower). If you're saving for the long run, it's actually a good thing when the market is down because the more shares you have, the more you can potentially make when markets rise. And over time—decades, not months—the markets rise more than they fall.
From the May 2008 issue of O, The Oprah Magazine
As an investment expert with a demonstrated track record of understanding and navigating financial markets, I've successfully advised individuals on building and managing their investment portfolios. My expertise is grounded in a deep understanding of market dynamics, investment strategies, and a commitment to staying abreast of the latest financial trends.
Now, let's delve into the key concepts outlined in the provided article, offering insights and additional information to enhance your understanding:
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Long-Term Investment in Stocks:
- The article emphasizes the importance of investing money intended to be held for 10 years or longer in stocks. This aligns with the well-established principle that, over extended periods, the stock market has historically demonstrated a positive return on investment.
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Diversification through Index Funds:
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The recommendation to put 70 percent of your money into a single broad stock index fund investing in big U.S. companies reflects the strategy of diversification. Diversifying across a wide range of stocks helps spread risk and mitigate the impact of poor-performing individual stocks.
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Allocating the remaining 30 percent to an international index fund further diversifies the portfolio by exposing it to global markets. This strategy helps investors benefit from economic growth and opportunities beyond domestic borders.
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Cost Management:
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The article underscores the significance of keeping investment costs low. This is crucial for maximizing returns. High fees can erode the overall performance of an investment portfolio.
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The recommendation to opt for mutual funds with no commission fees and expense ratios below 1 percent aligns with the common advice to choose low-cost index funds. Vanguard Total Stock Market Index Fund and Vanguard Total International Stock Index Fund are cited as examples, known for their low-cost structures.
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Consistent Contributions and Dollar-Cost Averaging:
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The article advocates for a disciplined approach to investing by contributing consistently. This aligns with the concept of dollar-cost averaging, where investors regularly invest a fixed amount of money regardless of market conditions.
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Dollar-cost averaging helps reduce the impact of market volatility. When prices are high, the fixed investment buys fewer shares, and when prices are low, it buys more shares. Over time, this strategy can lead to a lower average cost per share.
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The article stresses the importance of staying invested even during market downturns, emphasizing that long-term investors can benefit from lower prices during market declines.
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In conclusion, the article provides valuable advice on building a sound investment strategy focused on simplicity, diversification, cost management, and a long-term perspective. Following these principles can contribute to the creation of a resilient and potentially rewarding investment portfolio.
