The best investment strategy for most people is to KEEP IT SIMPLE. Don’t complicate things by investing money or you’ll probably feel uncomfortable and lose interest. Here we offer a simple solution for both choosing investment options and asset allocation.
The best investment options for most people looking for simplicity: index funds. You don’t need to worry about the performance of the funds, as these are mutual funds that track an index of stocks or bonds. Also, the cost of investing money is low if you opt for a major no-load fund company.
The other half of the investment strategy equation is called asset allocation. To keep it really simple, you’ll invest in three different types of mutual funds: stock index funds, bond index funds, and money market funds. How much (what percentage of your total investment assets) should you invest in each?
The best investment strategy for most people: 50% in stock index funds and the rest divided equally between bond index funds and money market funds. Investing money with this asset allocation puts half of your money at risk in an attempt to earn higher returns. The other half is safer and pays interest in the form of dividends.
Your bond fund will generally pay more interest, and you’ll benefit when interest rates hold steady or decline. When interest rates rise, expect losses on any bond investment. Money market funds, on the other hand, benefit when rates rise and rarely (if ever) fluctuate in value.
If you want more security, put more money in your money market fund than in your bond fund. To get more income from this safer half of your portfolio, invest more in your bond fund. Otherwise, just go with our original asset allocation above.
Now you know how to set things up. But to have a complete investment strategy, you need to manage things over time. We’ll keep this simple too.
Don’t let your assignment numbers get out of line over time. If you started investing money with 50% in stock index funds and the other half split evenly as suggested…keep it up. At least once a year check your progress and your percentages. Move money when needed.
For example, you see that your stock fund represents only 45% of your total vs. your original allocation of 50%. Move money from your other two investment options to get back on track.
Why I call this the best investment strategy for most people: It’s easy to set up and implement; And you can get better returns than many investors without the risk of taking big losses like many do in a year like 2008.