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In my last blog, I went over the details of the investing world. In this blog, we will discuss about how to start investing.
Let me start with a quote “ Time is market is more important than market timing”.
If you are young, you have lot of time in market to invest you risk tolerance will be high than someone old.
If you are old, your portfolio needs to have a balance of risk ( stocks) and less risk ( bonds). Be aware that even bonds can lose value, but it would not be as much as stock.
Below process will help you to get started,
1. What is Portfolio.
2. What is Asset Allocation.
3. Investment Plan
4. Rebalancing
5. Stay on course.
Portfolio: This would define as a range of investments held up by you. You can build a portfolio with the multiple asset classes like Stocks, bonds, REIT, Gold.
It is important to have your portfolio as much as diversified. Modern Portfolio theory defines the rate of return based upon the diversification. You need to build your portfolio based you’re your risk tolerance by using different asset classes.
It is also not mandatory to have all the components in one’s portfolio.
Below components will help you to build a diversified portfolio,
1. US Stocks.
2. International Stocks.
3. US bonds.
4. International Bonds.
5. REIT
6. Gold
Asset Allocation : This is one of the critical components in your investment planning.
Based upon your risk tolerance level, you must define the percentage of the asset classes.
If you are young and you have lot of time in the market, you will be able to 100% stock, then your asset allocation will look like.
Asset Allocation for young:
Stocks – 100%
Next there would be a question on how much should I have to allocate between US and International stocks. As per study from Vanguard and other great minds, it is recommended to have 20% in International stocks.
Now your asset allocation will change to
US stocks : 80%
International stocks : 20%
Some people will also recommend investing in Total World stock market ( Ticker symbol : VT). This is based upon the market cap where you will have 8000+ companies.
North America : 58%
Rest of the world: 42%
It depends upon on how you want to simplify.
Next, based upon your age and risk tolerance you can include bonds for your stability.
Asset Allocation for person in 30’s
US Stocks: 60%
International Stocks : 20%
US Bonds : 20%
Sample questionnaire from vanguard will help you define your asset allocation
https://personal.vanguard.com/us/FundsInvQuestionnaire
Sample portfolio on how diversification helps
Investment Plan : Once you have defined your asset allocation, you need to prepare your investment plan.
Every month or every two weeks how much you will be able to invest. Once you identified the money which you can invest, make it automatic.
This is called Dollar cost averaging, as you invest periodically you will buy shares for the fixed amount. If the market is good, you will buy less shares for the same cost but if it is bad then you will buy more stocks. So, pray for bad market if you are in the accumulation phase.
Once you make it automatic, you will have less time to worry and more time for prepare yourself for the next goal.
The objective of investment plan is to stick in both the good and bad times.
Rebalancing: Rebalancing will help you to keep your asset allocation as per the allocated percentages.
As different asset classes grew at a different rate, your asset allocation will change.
Every year check for the percentages and do a rebalancing. In this case, you will sell your assets which did good for that year and buy the ones which did not grew as other.
This will help you sell at high and buy low, which is the exact opposite of what most people does.
Most people if they panic, they try to sell on the market low which defeats the whole investment plan.
So, every year just spend 15 minutes to rebalance to keep your asset allocation as needed.
Stay on Course: If you would have done all the above steps, you should not worry about your investments.
Make it automatic, spend less than 15 mins year for rebalancing, you will be performing better than 90% of the investor in the whole stock market.
Stick to your plan during the good and bad times and “Stay on Course”
Thanks for reading!!!
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