Unlike many investors, I don’t buy or trade individual stocks. I explain in detail why I’ve bypassed this new trend in a previous blog, but the main reason I don’t buy or trade individual stocks is because the price of stocks changes too quickly. It’s hard to predict if a stock will go up or down. Since stock prices are so volatile (and change so often) there is an increased risk that I might lose money. My goal is to invest in a way that increases the chance I’ll make a profit but has a low risk that I may lose money. The main way I maximize profit and minimize risk is by investing in index funds.
Index funds are groups of many different stocks that follow a certain index. For example, one index fund may follow the S & P 500 index and purchase hundreds of stocks from American companies. Another index fund may be filled with thousands of stocks from all around the world. There are many different choices. When you purchase an index fund you are buying a fund that has purchased a percentage of all the stocks in that index. By purchasing a percentage of hundreds or thousands of stocks, you have better diversification in your investment portfolio with much lower risk of losing money.
There are many different choices of index funds to choose from. I have accounts at Vanguard and Fidelity (which are two of many different types of brokerage firms). Through these companies I have chosen 5 main index funds:
1. Total Stock Market Index Fund I invest in this fund at Vanguard through my employer-sponsored retirement account at work (called a 403b which is very similar to a 401K). I also invest in this fund through my Roth IRA at Fidelity. This index fund has a portion of over 3,600 stocks from small, medium, and large sized American companies. With this fund, I own a portion of all the stocks in the United States. The greatest percentage of money in this fund is invested in Apple, Microsoft, Amazon, Facebook, Google, and Tesla. It also has much smaller percentages of thousands of other companies. Altogether, this fund has made over 20% in profit over the last year and 15% in profit over the last 5 years.
2. Total International Stock Market Index I also invest in this fund at Vanguard through my 403b and through my Roth IRA at Fidelity. Unlike the previous index fund, this particular fund has over 7,000 stocks from all over the world. 38% of these stocks are from European countries. 24% of these stocks are from emerging markets in developing countries. 26% are from countries in the pacific and about 6% are from countries in North America. This fund has made over 11% in profit over the last 5 years.
3. Total Bond Market Index Fund I invest in this fund at Vanguard through my work 403b. This fund buys almost all of the bonds in the United States. Since these are bonds, there is much less risk that I will lose money but because of this extra caution, the returns aren’t as great. This fund has over 10,000 bonds with 63% of them being US Government bonds. It has made a return of about 5% over the last 5 years.
4. Total International Bond Market Index Fund I invest in this fund at Vanguard through my work 403b. This fund buys bonds from all around the world. This fund has over 6,000 bonds with over 57% of them from Europe. It has made a return of about 4% annually over the last 5 years.
5. Real Estate Index Fund I invest in this fund through my Roth IRA at Fidelity. This fund is filled with lots of smaller real estate funds that are full of many smaller real estate deals. I chose to invest in this fund in an effort to add some real estate investments to my portfolio. Over the last 5 years, this fund has had an average annual profit of 5%..
Overall, about 20% of my money is in real estate index funds, 5% in bond index funds, and 75% is in stock index funds. What is the makeup of your investment portfolio? Are you using index funds?