As shown in my intricate image above, I am 100% invested in stocks.
“But I couldn’t possibly handle this much risk”
I personally feel that I am taking on more risk by not investing in 100% stocks. As not doing so, increases my risk of needing to work longer than I have to.
“But investing in stocks is much riskier than investing in bonds”
True, but I didn’t say I was investing in all high risk areas like individual stocks as shown below.
My only individual stock investments are more about my own demons of not letting completely go of the fun I have when investing on speculation.
I too still enjoy playing the stock lottery, but I keep this a very small percentage of my total portfolio and primarily limit my investments to healthcare as this is the sector I know best.
So far so good on these investments, but I will never try to fool myself that I actually know what I am doing, as truly no one does.
So how could bonds possibly be riskier than stocks?
Well, yes, technically in terms of safety bonds are safer. There are different types on bonds. But in general, they serve as a loan or a promise to pay back the principal and the interest associated with that particular bond. Whereas with stocks, there is no such promise.
I look at bonds more as a way to smooth the road when you are closer to retirement. Meaning, if the market tanks, bonds are used to supplement your retirement income when you are living off of your investments.
And because I currently am investing for the long term, I will be living off of my income and not my investments for the near future. So, I don’t need this kind of protection against a market drop. I actually would prefer a market drop because that means all of the index funds that I currently buy will be on sale.
Right now, I have no need for bonds because when the market drops, I keep investing. When the market rises, I keep investing. I have no plans to withdraw my money from my portfolio in the near future which allows me to continue investing without the need for the buffer that bonds hold. Meaning I never need to sell low on my investments since I am investing for the long term.
“In theory that sounds great, but show me the numbers”
According to Vanguard, from 1926 to 2016 the average annual return on bonds was 5.4% while over the same time frame the average return on stocks/index funds was 10.2%. To summarize, I just prefer making almost double on my money.
Yes, stocks were more volatile during this time frame and had more losing years along the way with more drastic peaks/valley but when looked at over time, stocks significantly out perform bonds. And because as a new investor I am investing for the long term, I can ride out this volatility all the way to the bank.
Weighted Portfolios
A weighted portfolio basically just means the diversity of a portfolio. Currently, my portfolio would be looked at as very poorly diversified as I am 100% in stocks.
- I don’t care. I’m investing in what statistically has the safest and most return.
- By index fund investing, I am creating my own diversity because I own percentages of stocks in all US markets, sectors, and companies, but this is an entire conversation in itself.
A weighted portfolio over time
As I near my retirement goals I will slowly transition to a more weighted portfolio. Meaning selling off some stocks to increase my percentage of bonds within my portfolio. This will protect me from needing to sell off my stock shares when the market is down and make me miss out on the most return for my dollar. During these down years I’ll live more off of my bonds so I won’t need to sell low on my stocks.
I understand that most people starting out are told to invest at around 80% stocks, and 20% bonds which from 1926 to 2016 returned 9.5% annually. But right now, I don’t even want to miss out on an extra 0.7% return.
Because remember, this is per year and although you may not have much invested right now, year over year losing out on 0.7% gains is going to add up to thousands of dollars. And that’s just more time you are going to need to work for.
For example, assuming you have $100,000 dollars invested and never contribute another dime. Over 20 years, if your compare the 9.5% annual return to the 10.2% return, you miss out on roughly $83,480… Compound interest matters when we look at long term investing. Don’t miss out on these returns!
Conclusion
There are many different investment strategies and the best one is likely the one that works best for your given scenario. This is my strategy and the one I recommend for people in similar situations as my own but it is by no means the only strategy. I wrote this because I get asked often what my investment strategy is.
There is no secret to my plan. No trick to my investing. No need for me to hire someone to manage my investment portfolio. Or no need for me to spend countless hours actively managing my accounts. It’s an easy transfer that occurs once per week, and then a waiting game.
It’s a very simple strategy, but one where I feel best utilizes my time, manages my risk, and maximizes my return.
What’s your investment breakdown?? Let me know what you think!
As always, feel free to comment below or if you have a specific question, feel free to message me here!
