How to set up your portfolio
If you're young and just starting out, begin investing
in an index fund that mimics either the Standard
& Poor's 500 or the Dow Jones Wilshire Total
Stock Market Index. The latter fund covers a larger
segment of the market (nearly 5,000 stocks). The
historical returns for both indexes are similar
because the S&P 500 constitutes roughly 80
percent of the Dow Jones Wilshire Index since
both are weighted by market capitalization. You
may also want to invest in a fixed-income fund
to a much lesser degree to provide some stability
to your portfolio.
If you've accumulated some assets
and want to construct a portfolio using expert
advice, check out the asset
allocation chart in Bankrate's Retirement
Guide. Use it as a basis to determine how your
money should be allocated to the various
asset classes according to your age group.
Notice that the younger you are, the higher the
allocation to domestic and foreign stock funds,
with only 10 percent going to fixed income. As
you get older, capital preservation becomes important,
so you allocate more to fixed income.
Once you have the percentages straight, buy index funds representing the appropriate asset classes to fill out your chart. It's as easy as pie.
We provide a table of Vanguard index
funds that can be used in your portfolio's construction.
Of course, other fund firms offer index funds
as well. Check out the ones at Fidelity Investments,
T. Rowe Price, Charles Schwab or the discount
brokerage where you may already have an account.
Make sure you select funds with low costs (less
than 0.3 percent) so the earnings and dividends
of the corporations you own will benefit you rather
than those ghoulish financial intermediaries.
Once you make your fund purchases, you can focus on other stuff going on in your life. After a year, rebalance if your assets go out of whack from their original allocations. That's really all there is to it. Not too mysterious, right?
Investing can be simple, not unlike
buying a new sound system that requires you to
spend some initial setup time. After that, you
can sit back and enjoy the compounding returns.