Sometimes, investing can be scary and intimidating. A recent article suggested this as one key reason that some 80% of millennials have not invested in the stock market. In my work as ETF Monkey, one of my goals is to take fear out of the equation, and suggest that anyone who has even a little money to invest can be successful. Let me give you an example of how I believe what, at first, can seem intimidating and scary can be made simple and understandable.
Recently, I read a wonderful article on Seeking Alpha, for whom I am also a contributor. In the article, the author performs a review of 2016 and, in the process, nicely explains some realities about investing. Someone new to investing, however, might find it a little technical and perhaps hard to understand. So, let me make an attempt to simplify it a little, and also explain how it relates to, for example, the three implementations of The ETF Monkey 2016 Model Portfolio.
The author explains that, when you invest, you expect to take a dollar today and turn it into a little more than a dollar at some future point. If you did not expect this, you would not invest in the first place, you would simply spend your money today. The key word, though, is expect. Any one of a number of events could cause your actual results to vary from what you expected. In fact, it is entirely possible that your investments could even lose money. This reality is known as risk.
Put simply, the more you reach for higher gains on your investments, the greater the possibility of loss. It's just the way the market works. Think about it. If there was some way you could make more without worrying at all about losing more, everyone would do this. Sadly, some investors don't understand this, only to get a horrible surprise when they open their investment statement one day and see a huge loss.
Diversification is what can help to minimize this. You see, not all asset classes move the same way at the same time. In 2016, for example, U.S. stocks went up, in fact very sharply following the U.S. election. In contrast, foreign stocks struggled, and bonds even declined slightly at the end of the year due to fears of higher interest rates.
In the original article I linked, the author suggests 3 approaches to diversification. Of the three, The ETF Monkey 2016 Model Portfolio comes the closest to replicating the author's third suggestion, namely: Active allocation adjustment using U.S. ETFs, International ETFs, and individual taxable fixed-income securities. Really, the only variant is that I use a bond ETF as opposed to selecting individual bonds.
How has this played out so far in 2016? I'll leave you with a quick picture to have a look. The blue line represents the YTD performance of the Vanguard implementation of the portfolio, the red line represents the S&P 500 index.
You will notice that, due to the previously mentioned surge in U.S. stocks following the election, the S&P 500 index has pulled ahead slightly over the past month or so. But, notice how much smoother the blue line is. Early in the year, it did not drop nearly as far as the red line. And, if U.S. stocks take a breather, the two lines may once again converge.
If you follow the links above to take a look at my 2016 model portfolio, you will see that it is comprised of a mere 8 ETFs. All have very low expense ratios. And, together, they diversify your portfolio across all the asset classes mentioned above, and even a couple more.
In conclusion, investing can be complicated. But it doesn't have to be. It is my goal to help you make investing simple.