WANT TO BUY the right investments? First, you need to decide why you’re investing. Are you looking to make a house down payment next year, put your toddler through college or fund a retirement that won’t start for 30 years?
That brings into focus the crucial issue of time horizon and hence the maximum amount of risk it’s prudent to take. While those who will spend their savings soon probably shouldn’t own anything riskier than a short-term bond fund, truly long-term investors could potentially stash 100% in stocks.
That doesn’t, however, mean you should take the maximum risk your time horizon allows. Other issues also come into play: You might opt to be more conservative if, say, you’re comfortably on track to meet your financial goals, you’re unnerved by the stock market’s price swings or there’s a chance you’ll need to dip into your portfolio earlier than expected, because your job situation is iffy.
While this portfolio-building guide offers nine steps, you might venture no further than the first four. Much hinges on how much complexity you’re willing to endure and what investment philosophy you favor.
That said, the sections that follow aren’t intended to be some freewheeling investment smorgasbord. In this guide, we aren’t wasting time—and risking lousy returns—by trying to pick individual stocks or hotshot mutual fund managers. Instead, in true HumbleDollar fashion, the goal here is capture as much of the market’s return as possible—by purchasing index funds with rock-bottom annual expenses.
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