As promised in the final pages of 7 Investments In Your 20's That Will Change Your Life, I've compiled many of the most practical long-term investments into a bonus chapter based on a Nobel Prize-winning strategy.
For long-term investors who want to see their money grow without having to manage their portfolio constantly, this is for you. This investment strategy is ideal for the type of person who wants to invest their hard-earned cash, forget about it for 11 months out of the year, then reap the consistent passive income.
As you have read in 7 Investments In Your 20's That Will Change Your Life, a successful portfolio is crafted to precision. This Nobel Prize-winning strategy for long-term investors requires annual rebalancing. One day out of the year, these nine investments need to be rebalanced, and their assets need to be redistributed back to their proper percentages.
Vanguard Total Stock Mkt. Index (VTSAX) - Allocation: 20%
Vanguard Small-Cap Index (VSMAX) - Allocation: 15%
Vanguard REIT Index (VGSLX) - Allocation: 15%
Vanguard Emerging Mkts. Index (VEMAX) - Allocation: 10%
Vanguard Europ. Stock Index (VEUSX) - Allocation: 10%
Vanguard High-Yield Corp. Fund (VWEHX) - Allocation: 10%
Vanguard Pacific Stock Index (VPADX) - Allocation: 10%
Vanguard TIPS Fund (VIPSX) - Allocation: 5%
Vanguard Short-Term Investments (VFSTX) - Allocation: 5%
As you can see, I chose these nine investments to be held through the brokerage firm Vanguard. Why? Vanguard is credited as the first company ever to create an index fund. Vanguard's first investment trust was founded on December 31, 1975. Founder John Bogle has an outstanding book called The Little Book of Common Sense Investing, which talks about purchasing index funds with low expense costs (which Vanguard offers) and guaranteeing your fair share of stock market returns. Without having a financial manager, high expense costs, or high risk, these nine Vanguard index funds will grow enormously over 20+ years. As long as you allocate these assets to reach their initial start percentage at the end of each year, sit back and watch your wealth compound.
Take a look at the asset allocation percentage next to each investment. Asset allocation is essential to this particular investment portfolio because you want the distribution of your assets to match the original percentage at the end of each year.
For example, when you initially start this portfolio, VSMAX has an allocation of 15%. Let's assume that your yearly rebalancing is needed, and VSMAX now holds 24% of your total assets because the stock has done exceptionally well. With VSMAX now holding 24% of your portfolio, this means the other eight funds have likely shifted in percentage.
Hypothetically, let's say the eight other funds decreased by 1% each. We would then redistribute the extra 8% from VSMAX back into the other eight investments at the end of the year. Taking away that 8% now puts VSMAX back to its initial 15%. Additionally, all eight other investments are back to their initial percentages because we added 1% back to each of them.
In simplistic terms, you sell VSMAX at the height of the market. Then you redistribute your funds by purchasing a percentage of the underperforming indexes. Sell at peak price, buy at a low market price.
Disclaimer: When allocating your assets, an index's percentage may decrease, but that same index's profit may increase. How is this possible? Well, if VSMAX's stock price increased enormously while VIPSX only made a small profit, we could see a scenario where VIPSX's asset allocation percentage could drop a percent or two because VSMAX did so well.
Rebalancing once a year with this diversified portfolio will give you a surplus of funds that you can reinvest and compound exponentially long-term.
Asset allocation can be confusing to understand and even more confusing to explain. If you would like additional assistance, Investopedia.com has a 2-minute video here. If you are a visual learner and this isn't making complete sense to you, I would check out the short video or others like it on Youtube.
If you have landed on this page straight after reading 7 Investments In Your 20's That Will Change Your Life, then a huge congratulations to you! You have discovered what it takes to create a business lifestyle mindset. You have unmasked every primary type of investment trading on the Stock Exchange. Lastly, you have uncovered the easiest way to craft your portfolio in 5 simple steps. I commend you on your dedication to your future self and the life you will create for your future family.
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Good investing,
Dan Sarver
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