What is the Simplest Way to Invest in Stocks?

Ask SmallIvy

Dear SmallIvy,

I’ve gotten about $25,000 as a bonus from my company that I’d like to invest.  I am not interested in spending much time doing this.  What is the simplest way to invest?



Dear Richard,

The simplest way to invest would be to buy a set of index funds.  With $25,000 I would buy a large cap fund, a midcap fund, and a smallcap fund.  I would put more in the midcap and the smallcap than the large cap.  For the simplest investment possible, just buy these funds and forget you have them (OK, you’ll need to pay some capital gains taxes, so remember to look at the 1099 the mutual fund company sends you watch year, but that is really about it.  As you near retirement, sell about 8% of the shares and continue to do this each year. 

If you are willing to put a little more time in you can increase your return through one additional step.  Let’s say that you decided to put $10,000 in the smallcap index fund, $10,000 in the midcap index fund, and $5,000 in the largecap fund.  This would be a distribution of 40%, 40% and 20% in the small, mid, and large cap funds.

Let’s then say that after the first year you had $15,000 in the small cap, $20,000 in the midcap, and $5000 still in the large cap.  This would be a balance of 38%, 50%, and 12%.  You should rebalance the portfolio to return to the 40%, 40%, 20% distribution by selling some shares of the midcap fund and buying shares of the smallcap and largecap fund.  This will have the effect of selling the shares fo the fund that did well (selling high) and buying shares of the funds that didn’t do as well (buying low).  Note that this will result in realizing capital gains, so it is not worth rebalancing unless there is a significant difference between the current allocation and the targeted allocation.

To ask a question, email  vtsioriginal@yahoo.com or leave the question in a comment.

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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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