A Slick 6-Fund Portfolio Hack to Supercharge your Returns.
An investing question that usually arises is, "How should I invest my IRA?" This question is as easy as it is complex; every investor has different individual objectives and needs. Once you have a basic understanding of the major investment asset classes, this question becomes easy to answer. This 6-fund portfolio not only diversify your investments across all asset classes, but also allow you to supercharge your returns.
A diversified portfolio
This investment portfolio incorporates all 4 major asset classes, including equities, real estate, cash and bonds. What's significant about this portfolio is its allocation percentages. Because it focuses more heavily on equities over fixed income, it may be best suitable for a young investor who is decades away from retirement or a person who can tolerate risks.
Equities: 85% to 90%
Equities and stocks are often used synonymously. A 85-90 percent portfolio is very bullish. Your equities allocation can be broken down as follows:
- A large cap fund: 55% to 60%. You may consider a S&P 500 index fund or ETF or a large cap growth index fund or ETF. Here's a guide on how to evaluate and select mutual funds.
- A mid cap index fund or ETF: 10%. This allows you to invest in mid-sized companies (market value of $2 billion to $10 billion).
- A small cap index fund or ETF: 10%. This allows you to invest in smaller companies (market value of $300 million to $2 billion)
- An international fund: 10%. A diversified portfolio is not complete without some kind of foreign holdings. Consider a diversified foreign mutual fund.
Fixed Income: 10% to 15%
Fixed income helps protect your investments from total loss, in the event your equities allocation were to suffer severe market headwinds. It encompasses cash and real estate. By real estate, we're talking about real estate investment trusts (REITs). By their very design, and as required by the IRS, REITs must pay at least 90% of their income to investors! This payment usually comes in the form of [guaranteed] dividends. Allocate your fixed income as follows:
- A bond fund: 5% to 7.5%. Consider a low cost total bond fund. There may be instances where you may not need bonds in your portfolio.
- A real estate ETF: 5% to 7.5%. Again, real estate ETFs give you guaranteed dividends. U.S. News & World Report has compiled a list of some of the best real estate ETFs.
The bottom line
Investing should be easy and fun. Always start with the building blocks and use them in different combinations. Choose your allocation percentages based on your age, risk tolerance and other individual factors. Remember stock market investments are risky: you may gain or lose money.
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