After many years of investing my pennies and trying to beat the market I realised that it was all a waste of time. The evidence is that almost zero fund managers achieve above average returns.
Therefore the best approach is to simply buy index funds that follow market performance and to choose funds with very low costs. This is called “passive investing” and the Monevator blog provides a lot of very useful information.
We would all like the value of our investments to increase smoothly and to achieve this we need to “diversify” by purchasing index funds that invest in different types of assets such as Equities (shares), Bonds, Gold etc.
There are good articles on Monevator and others about asset allocation in a portfolio but for the ordinary person it is sufficient to consider Equities and Bonds because usually if equities go down then bonds go up.
Equities are shares in a companies that give you a share of the companies’ profits and Bonds are loans to companies that give you interest payments. Bonds issued by Governments and big companies are typically safe investments.
As your age increases you need to play safe with your savings; bonds are safer than equities so the rule of thumb is.
- The percentage of bonds in your portfolio should equal your age*
Therefore if you are 20, you have 20% bonds and if you are 60 you should have 60% bonds.
Vanguard has kindly provided a set of very low cost funds that has this diversification built in.
- LifeStrategy™ 20% Equity Fund
- LifeStrategy™ 40% Equity Fund
- LifeStrategy™ 60% Equity Fund
- LifeStrategy™ 80% Equity Fund
- LifeStrategy™ 100% Equity Fund
I have scoured the market for better offers but these remain the best choice for passive investors.
* It is expected that we will work longer and live longer. Therefore some advisors would recommend “age – 10” rather than “age”.