Question:
How complicated should my portfolio be? I grew up in the era where there were stocks and bonds. That’s it. Nowadays I’m being told about EFTs, TIPS, emerging markets, different asset classes within stocks… It’s a lot to take in.
Answer:
Like all things in Finance and Economics, it depends. A simple portfolio works best for someone who may have limited assets, but for those with millions upon millions to invest, they can afford to get into some more exotic asset classes.
You can, generally, find an exchange traded fund for nearly everything—with and without leverage. Products have certainly become more accessible to the average investor. However, regardless of an investment’s complexity, we feel that you need to fully understand the investment’s risks, expenses and how it makes money. Complicated doesn’t always mean better.
In many ways a simple portfolio may be better. The investments are more likely to be easier to understand, more transparent, liquidity shouldn’t be an issue, and oftentimes, cheaper. Generally, everyone understands what a stock is. It’s an investment in a company that gives you partial ownership. But there’s one big thing to remember when investing in stocks: We recommend you hold at least 8 of the 10 sectors in order to diversify into different industries and types of businesses.
Bonds are different, but fairly simple to understand. When you buy a bond, you are loaning money to a company, municipality, government, or other entity, for a set amount of time. Unless, of course, the bond is callable or the company fails. In exchange for loaning the money, the entity pays you interest, i.e. the coupon, at set periods, such as, semiannually, quarterly, annually, etc., until the bond matures. At that maturity date, the company returns the money borrowed to the bond buyer, usually $1,000 per bond.
Other investments for a simple portfolio would be a mutual fund or ETF based on an index. These are extremely efficient and inexpensive ways to buy a diversified basket of stocks or bonds. ETFs, typically, charge about 0.5%, or less, per year, because they are most often passively managed to match an index. While mutual funds can be passive and charge very little, most are actively-managed and charge an annual fee of about 1.2%. You pay more for active-management, because you are paying the talent to manage investments and make decisions in an effort to beat their respective benchmarks.
At Henssler Financial, we believe you should Live Ready, and that means fully understanding the risks and costs associated with your investment. If you would like guidance on understanding your investments, the experts at Henssler Financial are here to help. You may reach us at 770-429-9166 or at experts@henssler.com.