Here are seven tips on how to invest in the stock and bond market:
Use low-cost, index mutual funds or exchange traded funds as opposed to actively managed funds. Index funds have lower operating expenses than actively managed mutual funds and research has shown that it is very difficult to outperform the market using actively managed funds.
Diversify among multiple asset classes. Invest globally in small, mid-size and large stock index funds. Include a small allocation to real estate (REITs), and add short-term, high quality bond funds for reducing volatility. Retirement date mutual funds exist today that allow you to own all of these asset classes in one fund.
Invest according to your risk tolerance. The higher your risk tolerance, the higher percentage of stock and real estate funds you own. The lower your risk tolerance, the higher percentage of bond funds you own. A common allocation for someone in their 60s is to own roughly 50 percent in stock funds and 50 percent in bond funds.
Buy and hold. Once you come up with a portfolio that is effectively diversified among multiple asset classes, resist the urge to constantly change it. One of the biggest mistakes many investors make is they change their strategy too often. All asset classes move up and down at random intervals.
Use a total return approach for income. When it comes time to start drawing money from your portfolio, there are two basic choices regarding your method of distribution. The first approach is known as the income approach, where one simply takes the current income that is generated from a portfolio in the form of interest and dividends.
The second approach is the total return approach, where spending money is drawn from both the income in the portfolio and a portion of its principal. With the total return approach, distributions are normally taken from each fund based on its percentage allocation in the portfolio.
Rebalance your portfolio to its target allocation annually. This helps to maintain your chosen level of risk, and take advantage of price changes by automatically buying low and selling high.
Work with an independent, fee-only registered investment advisor (RIA). As opposed to a broker or sales agent, a fee-only RIA has a fiduciary duty to act in your best interest. They don’t receive sales commissions and thus are not subject to the conflicts of interest other “advisors” face. — Christ Nolt
(Chris Nolt is an independent, fee-only registered investment advisor and the owner of Solid Rock Wealth Management, Inc. and Solid Rock Realty Advisors, LLC, sister companies dedicated to working with families around the country who are selling a farm or ranch and transitioning into retirement.)
