It doesn't have to be complicated.
Investing in the stock market isn’t complicated. So why does it seem that way? Some investors make it complicated because they think their tactics will give them an edge over other investors. Or they may feel that creating complexity justifies the fees they are charging their clients. They might develop complex market models, use derivative instruments, go short, leverage up, use technical signals, and a myriad of other things. Leave the complexity to them.
For you and I, we can keep it simple.
Use an online asset allocation questionnaire to determine how to allocate your money.
Buy ETFs or mutual funds that fulfill the asset allocation plan in step one.
Review your portfolio once or twice a year to rebalance your holdings back to your original plan.
1. Asset Allocation Plan
One of my favourite lines from The Sopranos is Tony saying: “I got my money tied up in asset allocation.” Tony is a complex character, and this line shows his lack of understanding of managing his money despite the complicated manner in which he makes it. Asset allocation simply means how you are allocating your money between various types of investments. It’s not, as Tony thinks, an investment product.
To get started with investing, you need to know how you should be dividing your money between asset classes, mainly cash, fixed income and stocks. There are free questionnaires online that will give you a suggested breakdown of where to invest your money based on things like your investment time horizon and how much volatility you can stomach. You can search for “asset allocation questionnaire”.You will then want to go further, and decide how much of your stocks will be invested in Canadian stocks, US stocks and international stocks. I’ve suggested an asset allocation breakdown for various levels of risk tolerance and time horizons here.
2. Choose Your Mutual Funds or ETFs
For most people, investing in mutual funds and ETFs is the most practical way to go. If you love investing and want to spend your time researching stock, and if your portfolio is large enough that you can diversify by owning a number of stocks, then go ahead and buy individual stocks. For everyone else, mutual funds and ETFs were made for you. You can read more about mutual funds and ETFs here.
Whether you choose mutual funds or ETFs is up to you. Choosing mutual funds is a little overwhelming due to the huge number of choices, differences in how well they perform and the fees they charge, and how they are structured.
ETFs, in my view, are easier to choose. I like to choose ETFs that:
Fit into my asset allocation plan
Have very low fees
Are managed by the big names in the industry.
There are many great blogs and websites devoted to choosing ETFs. You can also check out the annual Moneysense Best ETFs in Canada, which is updated every year.
3. Get Invested and Let It Be
Once you have decided what to invest in, get invested. Don’t wait for the next market pullback - it’s totally unpredictable. Studies of long-term investment portfolios show that it’s more important to invest early than try to time the market.
Now, stop checking it.
Have a look at your portfolio infrequently, perhaps once a month or once a quarter. Over time, your portfolio will drift away from your original asset allocation plan because each of your funds will have realized a different return. Every 6 or 12 months, rebalance. This means selling a portion of the funds that went up, and buying more of the ones that went down to get you back to your ideal split.
You might also consider an asset allocation ETF. This is an ETF that invests in a variety of ETFs, and if rebalanced for you, making your job even more hands-off.
Although the plan is simple, it doesn't mean it's always easy. If you're unsure of how to move forward and you need some guidance and education, get in touch with me for a session of coaching. I'll get you going and be here to help you along the way.
I got my money tied up in asset allocation.
The business schools reward difficult, complex behaviour more than simple behaviour, but simple behaviour is more effective.