Mediocre financial advice can earn you mediocre investment returns — and mediocre investment returns are all you need to save for a house, send your kids to college, and fund your (potentially early) retirement. Mediocre investment advice is pretty straightforward. In fact, the only thing that’s complicated about getting mediocre financial results is the stuff that comes before investing: Things like earning money, keeping your debt in check, finding a career, living frugally, and most crucially, building an adequate emergency fund.
Once you’ve got those things taken care of, you’re ready to start investing. If you’re at that point, here’s my mediocre investment advice: Create a diversified portfolio of low-cost investments and rebalance it annually.
It’s important to have diversity at several levels. Eventually you’ll want diversity in investment types — not just stocks, but also bonds, real estate, precious metals, foreign currency, cash, etc. More importantly, you want finer-grained diversity especially in the earlier stages of building your portfolio. Don’t let your portfolio get concentrated in just one or a few companies. (For what it’s worth, don’t let it get concentrated in the stock of your employer, either. That sets you up for a catastrophe, because if your employer runs into trouble, the value of your portfolio can crash at the same time your job is at risk.)
In the medium term — after you’ve got a well-diversified stock selection, but before it’s time to branch out into more exotic investments — you’ll want to expand the diversity of types of companies. Not just big companies, but also medium-sized and small companies. Not just U.S. companies, but also foreign companies. Not just tech companies, but also industrial companies and financial companies, and so on.
Diversity wins two ways. First, it’s safer: As long as all your money isn’t in just one thing, it doesn’t matter so much whether it’s a good year or a bad year for that thing. Second, it produces higher returns: No one can know which investment will be best, but a diversified portfolio probably has at least some money invested in some investments that will do especially well. (Of course retrospectively, there will have been one investment that does best, and risking having all your money in that would have produced the highest possible return — but that’s exactly what a mediocre investor knows better than to attempt.)
Of course, you don’t want a random selection of investments, even if such a thing might be quite diverse. You want a reasonably balanced portfolio — something I’ll talk about at the end of this post.
The less money you pay in fees and commissions, the more money you have invested in earning a return.
Getting this right is so much easier now than it was when I started investing! In those days, you could scarcely avoid losing several percent of your money right off the top to commissions, and then lose another percent or two annually to fees. Now it’s easy to make a stock trade for less than $10 in commissions, and it’s easy to find mutual funds and exchange-traded funds that charge fees of only a fraction of 1%.
Still, it’s easy to screw this up. Any investment that’s advertised is paying its…