Suggestions for New Investors

1. Before investing anything, accumulate an emergency fund in cash that will cover six months of spending.
2. Pay off high-cost debt.  If you have any debt with interest rates above 5%, pay it off before you begin your investment program.
3. Determine your total portfolio balance.  Add up all savings accounts, checking accounts, brokerage accounts, IRAs, and 401Ks.
4. Now that you have a total portfolio balance, start thinking of investments in terms of percentages instead of dollars.  The percentages should apply to your total portfolio, not a specific account.  For example, if I come across a high-quality company at a good price, I will normally invest 5% of the portfolio into the stock.  For Mutual Funds and ETFs that cover an entire region or investment style (growth vs value) I’m very comfortable investing 10-20% of the portfolio.  Many of my deep value micro-cap investments tend to be in troubled companies that have significant upside potential buy also carry significant risks.  These are 1% bets.  Thinking in percentage terms is a better way to size your exposure to different investments.
5. Now you need to make the big decision.  Are you going to be a stock picker or a passive investor with your investments on auto pilot?  For most people, passive investing is the best choice.  Social media & CNBC make it look easy to pick stocks and get rich. The primary reason is you are only hearing about the small group of people who are doing very well, and it is normally over a short time period with small amounts of capital.  It’s very difficult to outperform the market averages over the long run.  Roughly 80% of professional investors underperform the index and only 0.5% beat the market by more than 3 pts/year over the long term.  This is why Warren Buffett recommends index funds for most people.  I would only recommend picking individual stocks if:
   1. You like researching companies.
   2. You understand accounting and financial statements.
   3. You have a basic understanding of business valuation.
   4. You have the time to dedicate to the process.

People trading stocks with none of the above are most likely speculating, not investing.  There is nothing wrong with this, but it’s better to call it what it is and limit your exposure to this type of investing.  It’s not an approach you want to take with your life savings, especially as you get older, and your nest egg grows.

Assuming you decide to take the passive approach, you need to determine the best way to get invested.  The options are:    

1. Lump sum: go all in with the ETFs you have chosen.  My concern with this approach is that the U.S. market is very overvalued in my opinion.  Many argue we are in a massive bubble.  The S&P 500 trades at 38x normalized earnings compared to a long-term average of 16x.  The market would need to decline ~60% just to get back to average!  International markets are not cheap either, but their valuations are much more attractive than the U.S.  The problem you have is that if the U.S. market has a major correction, everything else falls too.
2. Stay in cash and wait for a 20-30% correction before investing.  This makes a lot of sense, but nobody knows when this correction will occur.  I’ve been anticipating it and hedging our portfolio for nearly 10 years now.
3. Dollar cost average.  Emotionally, this is probably the best option.  I’ve learned that with investing you want to minimize regret and the best way to minimize regret is to do things gradually.  I recommend investing 1/12th of your target positions every month over the next year.  If we have a big correction, you will be glad you did not go all in.  If the market continues to climb, you will be glad you have some exposure.  Regret minimization!     
4. Once you are fully invested, you should rebalance annually to get back to your target positions.  The rest of the time, enjoy life and you will probably outperform most professionals. 

 
Suggested Asset Allocation:
 
Vanguard Emerging Markets (VWO)            15%
Global Deep Value (GVAL)                            15%
Vanguard U.S. Small Cap Value (VBR)         20%
Vanguard U.S. Real Estate (VNQ)                 10%
Vanguard Int’l Real Estate (VNQI)                10%
Gold (GLD)                                                      5%
Gold Miners (GDX)                                       2.5%
Silver (SLV)                                                   2.5%
Cash                                                               20%
Total                                                              100%
 
 
 
 
 
 
Disclaimer: Askafinanceguy.com is not an investment advisor, brokerage firm, or investment company.  This blog is for educational and/or entertainment purposes only. Use this information at your own risk. Do not consider anything on this page to be legal, tax, or investment advice.