Earny Asks: What's the Easiest Way to Invest?
Investing doesn't have to be hard. You can set it and forget it using the Swiss Army knife of investments.
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Multi-tools
I believe in simplicity. If I can own one thing that will do the job of several separate things, I’m generally pretty happy. Like a Swiss Army knife or a Leatherman multi-tool. They’re great tools and I love how compact they are.
However, in most cases, having a multi-tool like those means making certain sacrifices and adapting to the shortcomings of those tools vs. separate tools.
Last week, I had the opportunity to drive the multi-tool version of a sporty car, the Subaru WRX tS. Like any car, it’s not without sacrifices, but it’s darn good.
Of course, I was able to commute to work in it and, as a four door sedan, it fits my whole family. The Recaro sports seats kept me comfortable, though the suspension was firmer than I’d like for driving around town.
I also took it to the racetrack, where it left Porsches and Corvettes in the dust. It ripped! The turbocharged motor had enough power to carry me to triple-digit speeds in places where my Miata race car is unable to. However, while the suspension was solid and confidence-inspiring for a street car, it didn’t handle as well as my race car.
I also drove it on gravel roads in the mountains around my town. The WRX tS felt like a rally racer and remained composed at speed over washboard surfaces. However, I did worry about a lack of ground clearance on one sketchy section that was more suited to Jeeps than cars.
Each strength came with a small sacrifice.
Investing is similar.
I once read that to be properly diversified, a portfolio should contain about 30 holdings. That way, when some securities go down, others are expected to cushion the blow.
Earny the squirrel isn’t so sure and could use a little help.
As an investor, what’s the minimum number of securities you need to hold in order to have a properly diversified portfolio?
- One
- Ten
- Thirty
- More
ANSWER
That Subaru could do it all. Whatever my mood was, the car would meet it. On my morning commute, I’d select Comfort mode, and the car would chill out. At the track, “Sport +” mode made the car aggressive, like a race car. In the mountains, Sport mode combined with Comfort suspension allowed me to drive at a spirited pace while the car’s suspension soaked up the bumps. (I was in a remote area and never saw another car)
If there’s a car that can do it all, then there must be a single investment that can, too!
It turns out that the minimum number of securities you need in order to have a properly diversified portfolio is… one.
There’s a caveat though. That one holding should be a professionally managed fund, like a target date fund. Some people call target date funds a “one-decision” investment.
If you’ve been reading Filthy Rich Animal, then you might know all about target date funds!
For example, we discussed them here, in the article that we showed all of the ways that other people can manage your money.
You may even own a target date fund in your 401(k). The idea is that you buy one investment, and the fund’s managers will take your money, pool it with other investors’ money and make investments on behalf of all of the fund’s holders. Their goal is to provide an appropriate level of risk and return for people like you.
It’s one decision. Simple, like a buying a Subaru WRX that does it all.
The theme of today’s question, however, is about sacrifice. And a target date fund isn’t perfect. However, the downside, for many, is worth it.
The downside of owning a Target Date fund is that you could do slightly better on your own, coming up with a plan to buy securities that match your desired asset allocations. The key word here is “slightly.” I’m talking about pennies on each $100 investment.
This week's companion article in Filthy Rich Animal is about how Laziness is the Key to Retiring Rich. In it, Kate Stalter describes how you can build a lazy portfolio using as few as three funds to get that diversification on your own.
The thing is, you’ll have to make a sacrifice either way. If you choose the target date fund, it will cost you a little bit of money. If you choose to do it yourself, you will sacrifice a little bit of time and energy.
Either way, the sacrifice will be worth it in the end. The important thing is to make a plan, get started, and to consistently add money to your investment account.
You can do this!
