Diversified Index Portfolio – Get Rich, Slowly or Quickly!

Everyone in today’s market is talking about the next big tech stock that can make you millions, but over time history has showed us that the winning strategy is actually a lot simpler than we thought. You guessed it, buying the indices!

For those of you just learning finance (never a better time to start than today!) an index fund is one that aims to track an overall portion of a market. The best and most widely used example is the Vanguard S&P 500 index fund. It seeks to invest and track the performance of the S&P 500, which represents that largest 500 companies in the U.S based on market capitalization. Now, investing in the S&P 500 is a great first start, but what if we want to diversify our income a bit more. What can we do?

Assumptions

In this situation, we assume that you are a younger person investing. Age 20-30. If you are older, the only difference in strategy that we will recommend is that you also allocate a portion of your portfolio in bonds so that you have one fixed income stream.

Diversification

Most advice will recommend that anyone have a portion of their capital in bonds, but I disagree. That may be “risky” of me, but as mentioned if you are young, time is completely on your side, so it does not really make sense to invest in a bond fund. Here is why.

First, equity markets have returned at least 6% historically, and closer to 10% if you include reinvestment of dividends. Whereas bond markets have returned closer to 3-4%. The reason people think stocks are risky is because your returns do fluctuate year over year, so you need to hold onto your investments generally for at least 5-10 years in order to see strong returns. However, given that we have this time, the return is MUCH stronger vs. bonds!

Second, if you are not at general retirement age (60+) then you will be working, and you should be working hard (you definitely have the energy to do so!), so you don’t really need the fixed income that a bond fund provides.

The bottom line is that your returns long term will be much higher if you invest in stocks vs. bonds, and you really don’t need the constant income from bonds while you are young; you are much better off growing your money in stocks.

REITS

REITS or Real Estate Investment Trusts are investment funds created to allow retail investors access to the national and global commercial and residential real estate markets. They can provide much higher returns than standard equity markets, as they are legally required to pay out 90% of their income in dividends to investors. However, these returns are taxed at the individual income tax rate (~35% vs. stocks taxed at 15% for long term holdings) so they can roughly even out with stocks, but they do provide a diversified source of fixed income. They provide a strong source of diversification because the real estate markets do not follow the exact same peak and trough patterns that equity securities do, so in certain cases where your money in the S&P is down, your money invested in REITS may be performing well.

Invest in Yourself

The S&P 500 and REITs are great, but the reality is that if you are not constantly investing in yourself you will not go far. For instance, lets say that you can save $5,000 per year at your job, and you invest it in index funds; that is great, but you’re not getting rich anytime soon. However, if you OBSESS over your skills and became the best in the world at what you do (whether it is a sport, a business, acting, singing, selling, you name it), you’ll no doubt make millions of dollars per year. So if you make $5,000,000 in one year because you’re amazing at your craft, and then you invest 80% of it in the S&P and 20% in a high quality REIT, you’ll make $380,000 passively (while sleeping). Think about that and your outlook on life changes.

If you want an even faster head start at changing your life, I recommend reading the following books at least 3 times. Consider them part of a life investment that will probably pay off 100x. Lets say yo spend $10 on a book, and then make $10 million from the knowledge you gained. I would take that bet, enjoy!

The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition) (Collins Business Essentials)

How to Get Rich: One of the World’s Greatest Entrepreneurs Shares His Secrets

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