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When they recommend the 15 to 20 solid stocks in your portfolio, are they referring to just individual companies, or is it common to include some broad based index funds, such as the S&P 500 and others with the individual stocks? Or should index fund investing be done in another brokerage account? Thank you
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Welcome Nickjr. We're glad you could join us.

One size does not fit all in designing a portfolio. This depends in part on your risk tolerance and how close you are to retirement. Even your personal preferences.

Do you invest in blue chips? Value stocks? Growth stocks? Speculative high flyers? Bonds?

Conservative investors often use an S&P 500 Index fund (or etf) as the core investment. Maybe as much as 50% of value. That's because over time S&P 500 Index funds tend to outperform other equities. They are low cost in terms of expense ratio and commission and fees. And they tend to be fairly solid.

Blue chips and bonds are even more conservative.

Volatility is a concern with the others. If you own equities when things are doing well, they will outperform other investments, sometimes by a lot. But they can also go way down. So this kind of investing requires a certain risk tolerance. And good decisions on when to sell.

Bottom line is I think most investors own some index funds, but the amount can be between 10 and 50% of your portfolio depending on what works for you. Personally I prefer growth stocks, but when none of them seem attractive, then funds go into index funds.
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Thanks pauleckler,

When I opened my first brokerage account, I opened an individual and a fidelity go account with fidelity.basically a low fee managed account I just have an auto deposit set to. I didnt really know if it was necessary but being so new I didnt think it would hurt me while I gain some experience in the individual account. You say when the equitys dont look good you move into indexes. For someone who considers to be moderate aggressive but doesnt think he would like to trade frequently would you only focus on stocks that you see long term growth? Is it even worth buying equities that you might have to follow very closely and sell often. I didnt have a problem with holding some potential bigtime industry changing equities like a cannabis or new tech stock that I could hold onto for awhile and see if it develops. I guess I'm looking for a slightly aggressive portfolio without the need to make to many changes. How many different combined indexes and individual longterm stocks do you really need in a portfolio to accomplish this. I read an article where an investor recommended 3 fidelity low fee ETFs IVV IXUS AGG that would be the core of a portfolio. One mirrors s&p one emerging and a bond fund. I guess I'm trying to find the right mix and allocation for a core position that I would leave alone. And then pick a few solid growth stocks that I might have to move but would prefer to count on them to prevail. Do you think I would be successful with this? I also have 2 year old Roth with vanguard and a 401k that I've had for 5 years, and for the last two I have been contributing, combined 16%. Do you think I'm going In the right direction. Do you see any red flags with this for my risk profile? Sorry for the long reply, It just kind of carried on.
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Part of this has to do with how much time you have to spend on investing and research etc. I'm retired. My CAPs portfolio is the stocks I own. I check CAPs every morning to see if something has changed by more than say 2%. Then you want to know why. Some news event? And react accordingly. I check the change in value for the last 90 days once a month and use that to decide what to buy and what to sell. I try to own good performing stocks while they perform. So every month trim a few under performers and buy something I this is doing better.

As a retiree, I have the time. But working people are busy and may not have time for all that. They are more likely to invest in mutual funds or etfs and let the pros pick the stocks for them (or own baskets of stocks matching certain indexes or sectors.)

As your resources grow and as you gain experience, many would add an international fund, a growth fund, a hot sector fund, sometimes a bond fund. Then gradually add individual stocks as you become aware of good opportunities.

Bond funds are hard to hold when interest rates are low and likely to rise. Prices are likely to fall. If you want to own bonds, buy the bonds themselves and hold to maturity. Investment grade bonds, probably with maturities under 15 yrs. Their market value will decline as interest rates rise, but you get full face value at maturity. Hence, market value does not matter to you unless you are forced to sell before maturity.

I think the fact that you are trying will lead to success as you figure out what works for you and as you become more experienced. The most important part is that you are saving and investing with a steady plan. Otherwise, your plan seems reasonable to me. Most individual investors are best off to invest for the long term. But when you become aware of good opportunities, I see nothing wrong with investing part of your funds. Some will do very well, at least for a while. Others will need to be trimmed if they fail to meet your expectations.

Good luck with your choices.
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If you dont mind me asking, That strategy you explain about monitoring good performers while they last and trimming some down monthly that start under performing, Do you do this in a portfolio that holds the other funds you mentioned such as an international, a growth, a hot sector, and a bond fund? I was curious if you held other accounts like a robo advisory w/ a low fee, a Roth, or a 401k that you mostly left alone, other than occasional rebalance, like an auto pilot? I feel good about owning the roth, the 401k, and my managed brokerage account, that I can just tweek my risk profile here and there. I feel it gives me a little protection as I learn a little in my brokerage account. Although, I have been looking into my 401k plan, and debating if i should use there brokerage window they offer, just to potentially add a few stronger funds, that might give me a slightly better return, but I wouldn't go crazy. I just heard the typical target funds are set up kind of lousy, but I dont know enough yet to make any changes to the company plan. The bond exposure has been difficult to grasp. I understand the inverse relationship, I just cant figure out when I actually should buy them or how many(Ive heard about the age rule, but heard it might not be to reliable). When you say buy the investment grade individually, so you can get back full face value. Does this not apply to bond funds that are considered pretty safe? Is the 15 year timeline determined, because it is a reasonable amount of time to allow the bonds to mature, and give yourself an opportunity to gain all the face value back? I guess anything longer just starts to get a little to risky? Thanks again for your insight.
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Let's take those one at a time--

Do you do portfolio trimming in a portfolio that holds the other funds you mentioned such as an international, a growth, a hot sector, and a bond fund?

Yes, but as a practical matter most mutual funds that I own tend to be mediocre performers. That means I'm only likely to trim them when the all the other under achievers have been sold. Or buy them when other opportunities are lacking. (Ie chart looks uncertain.) Taxes are often a major consideration in what to sell.

I have index funds, one bond fund, and BLE a closed end leveraged bond fund. At this time I have no international funds or sector funds. Most recently I had SOXX, which tracks the Philadelphia Semiconductor Index. I usually own only domestic stocks but many multinationals have large international components.

if you held other accounts like a robo advisory w/ a low fee, a Roth, or a 401k that you mostly left alone, other than occasional rebalance, like an auto pilot?

No, I don't use an advisory. I do my own research and make my own choices. Yes, I have a small Roth (index funds) and a sizable IRA (doing RMDs). I have had several 401Ks but rolled them over to my IRA. I think rebalancing is mostly for mutual funds. My trim and buy routine tends to keeps things balanced. But I deliberately try not to over buy in one sector.

401k plan, and debating if i should use their brokerage window

I never had a 401k that had a brokerage window. Watch out for high fees. Others say some are expensive. So better to invest in a Roth where you can do your own thing for low fees (if you can spare the funds).

I just heard the typical target funds are set up kind of lousy

Target funds tend to put you into index funds when you are young and then gradually shift to bond funds as you get close to retirement. If you invest in say a 2040 fund, expect to be 100% in bonds in 2040. To reduce bond allocation chose a longer one like say 2060. The bond allocation is out of date. Time was when you expected to retire at 65 and die at 72. But now many live to 95. You do not want a 100% bond allocation in retirement. You need equities to keep up with inflation when you will be retired for say 30 years.

Do check out the expenses for Target funds. You want something low cost. Those that own multiple mutual funds and then charge your their fees in addition to the funds expenses are too expensive. Check it out before you decide.

When you say buy the investment grade individually, so you can get back full face value. Does this not apply to bond funds that are considered pretty safe? Is the 15 year timeline determined, because it is a reasonable amount of time to allow the bonds to mature, and give yourself an opportunity to gain all the face value back?

If you have questions about bonds and bond funds, check out the Bonds and Fixed Incomes discussion board.

Bonds are a contract to pay a fixed interest amount at specified times and return your investment at maturity. Hence, an 8% bond pays $80 in interest for $1000 of face value. But what happens when interest rates rise? If you want to sell the bond on the market before maturity, to be competitive you have to reduce the market price to meet the new competition. So bond funds are not in danger of bankruptcy, but their net asset value has to be driven downward by market forces. Theoretically, if you buy bond fund shares at low interest rates, you will not be able to sell without taking a loss until interest rates return to where they were when you bought. That can take years, maybe decades.

The other problem bond funds have is when rates rise and people begin to sell in anticipation of declining net asset values, the fund is forced to sell bonds for cash. That means they cannot hold their bonds to maturity.

Bonds are available for a wide array of maturities. 30 year used to be a typical long bond, but now some go up to 100 years. Short bonds are available, but interest paid tends to be low (very much like money markets). The thing is, if you buy a corporate bond, you know who the successful companies are now. Buying their bonds now is safe. That judgement probably will hold for 3 or 4 years. 7 years is a bit more risky. 15 is about the limit for individuals. Long bonds are bought by institutions, not individuals. (Although of course there are professionals out there who do.)

[I'm surprised that we don't have other posters offering contrasting points of view. Be aware that I'm sharing my views, but others may have other views. None of this is cast in concrete.]
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Your post: When they recommend the 15 to 20 solid stocks in your portfolio, are they referring to just individual companies, or is it common to include some broad based index funds, such as the S&P 500 and others with the individual stocks? Or should index fund investing be done in another brokerage account? Thank you

How you approach your investing depends greatly upon the demands of your life. When I was working full-time, newly married, raising a kid, starting a small business, and managing my portfolio, one year my portfolio under performed the market by 24% (market up 22%, portfolio down 2%) I realized I was over loaded. Since managing my portfolio was the only task I could off-load, that's what I did. The management fees are a lot less than a 24% under performance. After I retired (still managing my and now my mom's small business, about 500 hr/year) I found I didn't have the time or interest to manage my portfolio, there are just to many other things to do in life which are fun.

I bought my first stock in 1965. Let's look at how the term "diversification" changed since then, at first it meant owning 15-20ish US large cap stocks, generally in different market segments because in the 50's and 60's there wasn't much international competition (it's amazing how blowing up other countries industrial bases lowers competition -WWII) then diversification expanded to include small and medium, then diversification expanded again to include international (thanks, for paying us to rebuild your industrial base, rats, global competition starts). As you are experiencing there are many, many, many ways to diversify.

Until you have more knowledge a couple of varied index funds (which didn't exist in the 70's & 80's) such two of as a US Large Cap, Small Cap, and International probably is sufficient diversification. Start learning with phony money accounts, then set aside a few $10k to use while practicing buying and selling individual stocks, it's amazing how having real money in the market helps you focus.

Just a note, the guy who manages my money has $1.5B under management, a full-time staff of 20, something like 30-40 years of experience. And he's a small-time money manager. When you're buying individual stocks you're competing against him. Who do you think will win the most often? There are folks on the Fool who claim to regularly outperform the market, and BTW I believe them. Learn from them, understand the risk/ reward profile they're using, and realize you're competing with them as well.
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When they recommend the 15 to 20 solid stocks in your portfolio, are they referring to just individual companies, or is it common to include some broad based index funds, such as the S&P 500 and others with the individual stocks? Or should index fund investing be done in another brokerage account?

The purpose of the 15-20 stocks (investments in companies is how I prefer to frame it) is to achieve diversity, so that if one company suffers a bad day (week, month, year) at the market, it only pulls down a portion of your portfolio and not a majority of it. An ETF or mutual fund can also accomplish that goal because they contain investments in multiple companies within a single investment vehicle.

But diversity in market sectors is also key, so that if all companies in a particular sector (gaming industry) experiences a downturn (Fortnite, anyone?) you still have investments in other market sectors that may remain stable or growing. And that's where mutual funds and ETFs can fall short, because they tend to follow themes, such as a tech ETF or real estate mutual fund.

Fuskie
Who thinks as long as you achieve a good level of diversity in your investments, the mixture of funds, ETFs and individual equities is a question of personal comfort...

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Disclaimer: This post is non-professional and should not be construed as direct, individual or accurate advice
Disclosure: May own shares of some, many or all of the companies mentioned in this post (tinyurl.com/FuskieDisclosure)
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Nick a few things I have settled on after 40 years of investing -

#1. Target Funds really sound good for a person beginning to invest - Before you do that, look carefully at sets of target funds from several brokerage firms. I did that back in the 1990s and found that one companies fund with a 30 year horizon might have the same level of risk as a 20 your or 40 year horizon at another brokerage firm.

#2. For a long time, I have felt Warren Buffet really knew what he was doing. Some decades have been better for him than others. But he did put his money where his mouth was back in 2008 -- that was before the big recession. He said he would put a single mutual fund (S&P500 index) against all hedge fund comers for a period of 10 years. It was not particularly close even though Warren's bet was more than cut in half in the first year. Google Warren Buffett million dollar bet.

#3. When you look at investment returns for mutual funds, keep in mind if that fund is trading stocks, it is creating income taxes you get to pay, unless your investment is in a 401K or similar sheltered account. The reported returns generally do not reflect the effect of taxes.

#4. You will hear about many people who have information or investment approaches that "can beat the market". Apparently those did not want to take Warren Buffet up on a bet.

#5. There is a great allure at picking or finding some great stock. Back in the 1990s it was Microsoft. I am not sure what the current example would be. A few (Very Few) people will do that. But to beat the market, in my view you need at least one of three conditions. #1. You are very lucky. #2. You know something the people at Fidelity, Schwab and Vanguard do not know. #3. You are smarter or have better computer analysis than those folks managing mutual funds. I personally fell into the trap of confusing the rising market on the 1990s with my own investing skill.

If you have a long investing horizon, (and I sense to may have that)just put your funds in the S&P500 while you study and learn.
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Nickjr,

Welcome to The Motley Fool.

You wrote, When they recommend the 15 to 20 solid stocks in your portfolio, are they referring to just individual companies, or is it common to include some broad based index funds, such as the S&P 500 and others with the individual stocks? Or should index fund investing be done in another brokerage account? Thank you

Who are they? I don't suppose you bought into one of TMF's newsletters?

Most new investors probably shouldn't bother with investor newsletters. They should instead just pick either a broad stock index fund - like an S&P 500 fund - or they should choose a target date or strategy fund that takes all the guess-work out of investing for you.

Newsletters are generally sold to people that aren't satisfied with average performance and want to try to juice their returns in an effort to beat the market. But before you go out and try that for yourself, consider that something like 90% of actively managed mutual funds don't beat their benchmark indexes. Those are supposed to be professional stock pickers … and most of them aren't disciplined enough to at least get "average" returns.

So my recommendation to anyone just starting out is to start with a rather bland portfolio with just a target date fund or a broad stock market index or two. If you want to try your hand with juicing your return, don't do it with money specifically earmarked for retirement or other major goals. Instead start with just a small portion of your portfolio and set it aside as seed money. This usually means accumulating a fair amount before you seriously consider making direct stock investments.

Even then you should figure that this is going to take a good deal of your attention. Personally I've found that some of my best investment ideas haven't been ones anyone else has recommended to me - they're ones for which I've formed an investment thesis and come up with a strategy to profit from it. Usually that means some significant work on my part. What's more, my good ideas have usually had a "shelf life", meaning they work until enough of the rest of the market catches on, then they don't.

So my point is that there are very few significant investment opportunities that don't involve some kind of real work on your part … except for index investing. On the other hand index investing can give you serious returns without needing to spend your valuable time on it. Did you know that the S&P 500 total return index has yielded something like 10%/year? The returns are very, very … lumpy. And about 2% of that is from boring old dividend yields. But those returns are very real and there have been lots of diligent stock market investors that have made serious money by just investing in an S&P 500 index fund.

Now as for your specific questions:

1. Investing in the S&P 500 gives you the diversification of investing in the 500 largest US companies by market capitalization, while picking 15 or 20 individual stocks is probably just the minimum you need to minimize your single stock risk. Most people should just pick a broad index fund.

2. Buying individual stocks must be done with a stock broker. Buy an index mutual fund can be done either at a broker or in some cases directly from the fund company. However many large brokers have decent low-cost index fund offerings available. Whether or not you separate stock and fund purchases into separate accounts depends on a) personal preference, and b) whether or not some of the investments are in segregated accounts such as an IRA. In may respects the decision of whether or not to separate your purchases into different accounts is an orthogonal issue from whether or not to buy individual stocks or just an index fund.

- Joel
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Hi -

I researched quite a bit about investing.
I read:
https://en.wikipedia.org/wiki/The_Intelligent_Investor
The Four Pillars of investing - by Bernstein
A random walk down wall street - Malkiel
Plus https://www.investopedia.com/terms/e/efficientfrontier.asp

It all pretty much taught me that buying individual stocks wasn't going to be my cup of tea.

So, now I do a modified coffeehouseinvestor.com portfolio

Also these: https://www.marketwatch.com/lazyportfolio

It's worked out well for me over the past 25 years. About 8.4% annualized. You could do worse.

I still own some stocks from back when I thought I knew what I was doing, but that is only because the pay dividends and I reinvest them. MSFT, XEL, MRK, KO

V
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This is the efficient frontier link I meant to reference:
http://www.efficientfrontier.com/
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Nickjr,

For yet another perspective, I always highly recommend that new investors read Jim Collins' "Stock Series" from his blog. Link:

https://jlcollinsnh.com/stock-series/

Jim is very down-to-earth and breaks complicated concepts into easily digestible chunks. Once he does that, he provides a very Simple Path to Wealth (which he recently published a book of the same title). If you take the time to read the whole Series, I guarantee that you will come out of it with a lot of new knowledge, but more importantly a new perspective.

I don't take everything Jim says as gospel, but if I did, I'd probably be in an even better place than I am now - retiring in 20 months at the age of 55. What I recommend for those that read the Series and still have a proclivity for dabbling in the stock market, is to follow his advice with 75% or more of your investable dollars and use the rest to dabble. That's all most of us are really doing with our individual stock picks, whether we want to admit it or not. Few take the time to truly understand businesses and investing. The sooner you come to terms with your own limitations and aspirations in that regard, the better. Money compounds pretty slowly at first, but the decisions you make early on dramatically affect what happens to your nest egg in the later years.

If you take my advice above, and find that the 25% or so of your portfolio is outperforming the other 75% over a 2-3 year period, congratulations! You're probably a natural and can devote a slightly bigger chunk of your funds to active management. Just know that there are a LOT of professionals out there that can't outperform the indexes.

Draggon
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Keep fees low. Don't pay for newsletters, mutual fund fees, taxes, trade fees or helpers of any sort if you can help it. Put the great majority of your money and saved costs into the lowest cost SP500 index that you can find (0.03% or lower) and put your energies into what you love. If you love investing then you'll want to dabble but I'd follow the 75/25 idea above and review yourself fairly in a time weighted manner. In this years Daily Journal Corp's annual meeting, Munger said people don't understand math and that if you get 5% returns and pay 2% in fees, in time, you aren't giving up 40% of your gains, you're giving up 90% of your gains. I think the video is worth watching for that tip alone. https://www.youtube.com/watch?v=T_ZUhnv1Qqw Fees add up in the end. You might think Munger gave an extreme example but I've seen it happen with MANY large well-known mutual fund companies that grew so big they lagged the market but kept their high fees for years. See GABTX as one example.

And getting 7% returns and paying 1% is harmful over a 40 year run too. See:
https://www.nerdwallet.com/blog/investing/millennial-retirem...


There is a reason so many smart investing people like Buffett, Munger, Graham and more tout the SP500 index.

Good luck.
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If you have a long investing horizon, (and I sense to may have that)just put your funds in the S&P500 while you study and learn.

Wise words.

I started investing in the stock market in the early 1980s, starting with a mutual find my oldest brother told me to invest in. I put my IRA contributions into that fund for years, then decided I was smarter than them. So I began buying individual stocks. If they went down, I doubled down, figuring it must be a bargain. After a couple of years, I had lost most of the invested money. Sigh.

Fast forward 30 years. I've been buying stocks recommended by Stock Advisor/Motley Fool for the past 20 years. Some go up, some go down. The biggest takeaway for me...be patient (hold stocks for a minimum of 5 years, and 20 is better). And if you are starting young, you can build incredible wealth with just buying an index fund AND LEAVE IT ALONE.

Put away 10% to 20% of your income every year. You'll retire wealthy.
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Here's my answer to a similar question that someone asked on another board:
https://boards.fool.com/comments-and-suggestions-welcome-i-h...

When someone asks about buying individual stocks vs an index, I ask them back: "What advantages do you have over the people with enormous research resources and lots of experience that will allow you to outperform them, and the index you're measuring yourself against?" If you have some advantage(s) that's one thing, but if not, buying a total market index fund (low cost) is probably the better alternative.

Another factor is that the index will hold the couple stocks that really soar, and your personal stable of ~20 isn't likely to.
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Breeze your question is too kind.

In addition to the individual needing 'some advantage' it is necessary that advantage be great enough to cover the tax costs associated with the trade created tax expenses.
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