Set it and (mostly) forget it investing
With the evidence overwhelmingly in favor of passive investing for the long-term, why won't more institutions embrace these facts and shift their focus to advising clients on the benefits of index investing?
One reason: there’s a lot more money to be made by keeping the lie alive. The fees and commissions earned through active investing are considerably higher than passive (index) investing.
Index funds will achieve returns that are much closer to the market averages than the active funds that “try” to beat the market, and there lies the difference since even experts find it very difficult. This makes low-cost index fund investing an above average portfolio strategy.
"Investing should be dull. It shouldn't be exciting. Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas... it is not easy to get rich in Las Vegas... or at the local Merrill Lynch office." - Paul Samuelson, Nobel economist, excerpt from Paul Farrell’s ‘The Lazy person’s Guide to Investing’
Modern investing has become too complex for ordinary investors to really understand and profit from. Also, most lazy investing portfolio I have researched are practically US-focused or have multiple asset class combinations and not much for our local reference/use other than fund-based-investing.
On Asset Allocation
There’s more to the market than just stocks, and a good portfolio will usually include a few different types of investments. This may include real estate but I won’t include it as it is capital intensive and not ideal as a beginner investment. How much of each depends on your age, risk tolerance, and investment goals. A common rule of thumb is: [110 - your age = the percentage of your portfolio that should be stocks]
So, if you’re 30, you’d put 80% of your portfolio in stocks (110 - 30 = 80) and the remaining 20% in lower-risk bonds. If you’re more conservative, you may want to put 30% in bonds instead.
Getting started
1. Open an account and choose a low-cost index fund (Fund Supermarket, Bank, Investment House, Insurance); a simple rule is to compare the expense ratios, the lower the better.
2. Choose or figure out an Asset Allocation (See a quick summary below):
• 20 y.o. – 90 percent stocks, 10% Bonds
• 30 y.o. – 80 percent (Index Fund stocks), 20 percent Bond (Funds)
• 40 y.o. – 70-30
• If you don’t feel that you should be putting more into bonds/stocks, put that 10 percent or 20 percent as Cash positon
3. Establish a habit of (or Automate) savings-to-be-invested or make sure you allocate at least 10 percent of your income; contribute regularly and rebalance annually.
Once you’re done, forget about it! The idea is to set the allocations and leave them alone - not to time the market.
You can also substitute bonds for specific government issued (tax advantaged) investments such as: Pag-ibig modified fund 2, SSS Peso/Flexi funds and the recently launched PERA (our version of the US 401k & IRA accounts although our is not mandatory).
Keep it simple, cheap and stick to the plan through thick and thin.
Disclosure: I am invested in one index fund and a dividend-yielding mutual fund as well as a VUL-index-fund. This is not a solicitation or investment advice and is for informational purposes only.
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The writer is an RFP® - registered financial planner and helps people through CERTA, Inc.’s financial education programs (www.certa.ph). He is also a Real Estate Broker, author of the award-winning personal blog – www.vernongo.com and an Instagram travel-micro-blogger (@PhantomNomad).
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