There are three main asset categories: Stocks, Bonds, and Cash. The proportion of your portfolio in each of these 3 categories is what determines your final total return. Stocks have high risk and high return, bonds have low/medium risk and low return, while cash (money market, CD) has no risk and generally very low return. Those with a long time horizon may consider a greater proportion of stocks, while those near term needs may consider a greater proportion of bonds. A 60/40 split between stocks and bonds has been considered a middle of the road approach, suitable for the majority of portfolios.
If you hire a wealth manager, they will give 60% of your portfolio to a stock manager who will invest in 30-50 different companies. The problem is the vast majority of stock managers underperform the “market”, so you are not only getting worse performance than the “market” you are paying a fee to do so. The wealth manager will give 40% of your portfolio to a bond manager who will invest in individual bonds. The problem here is high trading costs, and less liquidity for individual bonds.
So, how do you invest in the “market”? The best and simplest way is through an exchange traded fund (ETF) that is based on one of the “market” indexes. The most popular stock index is the S&P 500 index which tracks the largest 500 companies in the USA. I prefer the Russell 1000 index which tracks the largest 1000 companies in the USA because it relies less heavily on the 10 largest companies in the country. For the bond “market”, index based ETFs also make investing simple.
