Financial Literacy - Growing your bottom line
investing
Long-term investing strategies

Green recommends that investors seeking a no-hassle portfolio follow a diversified asset allocation strategy and invest in no-load index funds. Investors need only check-in once a year to rebalance it according to the original plan.

To determine the ideal allocation, investors can follow an expert's asset allocation plan, visit a fee-only certified financial planner or make up their own.

Green shares this allocation from "The Gone Fishin' Portfolio," with the caveat that the book offers much more than just the allocation model.

"In the book I explain the importance of cutting costs, minimizing taxes, rebalancing and sticking with the program -- all the things that are important to someone's financial success," he says.

Gone fishin' asset allocation model
  • 15 percent U.S. large cap index
  • 15 percent U.S. small cap index
  • 10 percent emerging markets index
  • 10 percent European equities index
  • 10 percent Pacific equities index
  • 10 percent high-yield corporate bonds
  • 10 percent short-term investment grade bonds
  • 10 percent inflation-protected securities
  • 5 percent REIT index
  • 5 percent precious metals

Green suggests investors choose Vanguard funds, other no-load index funds or ETFs to populate the portfolio.

Many fund families offer no-load index funds, but be wary. Although some track the same indexes, not all are created equal. When choosing an index fund, investors should take note of fees and expenses as well as how closely the fund tracks the index it follows.

"If, historically, the fund is either plus or minus a percentage point off its benchmark, that's a fairly high tracking error," says Vanguard's Donaldson.

In other words, the best performance does not necessarily indicate the best index fund.

"Your goal is the fund that gives you the purest exposure to the segment that you're looking for," Donaldson says.

Some proponents of indexing subscribe to the efficient markets hypothesis, which holds that markets are rational and efficient. Stock prices reflect the true value of companies, affirmed by the consensus of a large, informed investment community.

Those who accept the efficient markets theory as true also believe that investors cannot expect to consistently beat the market -- a claim that many dispute and a big reason why actively managed portfolios remain popular.

"The biggest drawback -- if that's what you want to call it (to passive strategies) -- would be for someone who has a goal of outperforming the market. Because, really, actively managed strategies are the only way that you can do that," says Donaldson.

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Fundamental analysis

The allure of an active approach is its potential to beat the market. The flipside is that active strategies are risky and expensive because they involve more trading. Because of its relatively higher fees, actively managed funds have a tough time outperforming index funds.

These facts don't deter some investors. After all, mutual fund managers make a living betting on their investment prowess. Most employ fundamental analysis, though some use technical analysis as a guide to stock picking.

Fundamental analysis involves studying the entire picture of the broad economy, industries within the economy and then individual companies within each industry to assess its financial strength.

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