Get the Right Mix

Picking individual stocks is risky. You never want to put all your eggs in one basket (or even a few baskets) because if that one basket breaks, so do all your eggs. So you get many baskets.

If you’re a financial genius and can afford a team of financial geniuses and you’re lucky and you can spend your full working days on selecting investments, you may be tempted to hand pick those investments. But even then, I suggest you don’t (most professionals, even the best, still lose, like check out Bill Miller. Well you lose because they lose your money but they win because you pay them whether they win or lose. Not fair!).

No, instead, do the simple thing and just buy the whole stock and bond markets. Take the guess work out of it and don’t bet on individual companies, bet on the American economy continuing to grow like it has since its inception. Doing so makes it easy and very importantly, minimizes your expenses and fees you pay. All you need to buy is a total stock index fund and a total bond index fund.

That leaves just one high level mix to get right – how your money should be split between the stock index fund and the bond index fund. Stocks go up and down more but over time make more money while bonds go up and down less and make less money over time. With saving for retirement, when you’re young and don’t need the money for a long time, you can better ride the bumps than when you’re older and will need the money sooner.

A basic rule of thumb is to own your age in bonds and the remainder in stock. So if you're 30 years old, 30% of your investments should be in the bond index fund and 70% should be in the stock index fund. This mix, of stocks and bonds and the thousands of stocks and bonds wrapped within, results in diversification - an almost magical thing in investing that can minimize your risk and maximize your investment’s growth potential. It’s one of the most important things for your investment success and doesn’t need to be any more complex than this.