Most recently, I pondered all the money and life lessons I would give my younger self. And you guys echoed the sentiment with life lessons of your own, such as …
… letting go and moving on, instead of dwelling – NZ Muse
… taking calculated risks and chances – Need2Save
When I write a follow-up post in a few years from now, I would like to have nothing to say. Yes, you heard right. Nothing! Ideally, I would like to claim that I’ve done it right all throughout my 30s.
Odds = zero 🙂
So at a minimum, I would like to set myself up for early retirement. And investing is our best bet on reaching that goal. Here are the first few steps.
The next step is to choose your investments wisely. It shouldn’t come as a surprise that I am structuring my portfolio with index funds. Without further ado:
Now that I have pantsed my post-tax investment account, let’s dive in.
How to choose your investments wisely!
All of us who are currently working toward financial independence, are in something called the “accumulation phase.” While in this phase, you will want to be aggressive in your investment selections.
Accumulation Phase Stocks > Bonds
Stocks are looked at as aggressive investments because they are tied to the market. Given that the market basically resembles a roller coaster, stocks are suseptible to ups and downs. Bonds, on the other hand, are stocks’ friendly (read: safe) cousin. They are less volatile but will also not provide the potential for gains you are looking for during the accumulations phase.
Since I am, like so many of us, in the accumulation phase, the majority of my post-tax investments are in stock index funds. A small balance of stock is in individual stocks which I don’t advocate for. The only reason I own them is because my current employer awarded stock bonuses one year. I hold 5% in cash in addition to my emergency fund of six months worth of expenses simply because of peace of mind.
Did everyone notice the 10% I choose to hold in bonds? Now, there are many theories flying around the blogosphere about what your stock to bond ratio should be throughout your accumulation phase. Some advocate for 100% stocks and others for a split between both. It really depends on your aversion to risk.
I chose to keep 10% of my portfolio in bonds for two reasons. For one, my risk aversion is low, so holding 90% of my post-tax investments in stock doesn’t make me nervous. Secondly, some studies have proven that keeping 5-10% of one’s portfolio in bonds and rebalancing regularly actually does better than 100% stock portfolios.
What is rebalancing? Should your stock portfolio rise in value, you would purchase more bonds which will then be available at a lower price. To the contrary, if your bond portfolio rises in value, you would purchase more stocks instead. Always with the intention of keeping my 10% bond ratio in check. Why go through this exercise? Because you will always buy when prices are low vs. high!
How will you structure your portfolio to invest wisely with your future self in mind? Will you choose index stock and bond funds or invest in individual stocks? What stock to bond ratio meets your comfort level?
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