Building Wealth Through 'Involved' Investing
How should I invest if I have an 'involved' personality type?
If you have an involved investment personality, you probably do not want to invest in life cycle funds. The idea of that goes against the grain of how you operate. You like to have some involvement; you like to read the paper a little bit, you like to have a little bit of control and flexibility as far as what is going on in your portfolio. The best strategy for the involved investor is to build a portfolio; build an asset allocation yourself using index funds - just using index funds. By doing that, you can create a very low cost portfolio and you do have control over it. You can overweight certain asset classes and underweight others depending on your research that you have done and what you want to take advantage of.
What are 'index funds' and how can they help me build wealth?
Index funds are traditionally mutual funds, but there's a new kind of product out there called the exchange-traded fund. Whether it's a mutual fund or exchange-traded fund, an index is basically a basket of securities. Whether they're stocks or bonds, it doesn't matter. They try to match the performance of a benchmark. A benchmark - there are some common ones out there that people are familiar with - Dow Jones Industrial Average, the S&P 500, and these index funds are connected to and try to match the performance of the actual benchmark itself. There are a myriad of index funds out there. Anything you could possibly think of, there's an index fund for it. As an example, if you wanted to focus just on small companies in the U.S, there's an index fund for that. If you wanted to focus on large, huge, behemoth companies outside of the U.S, there's an index fund for that. If you wanted to focus on California municipal bonds, there's an index. Any kind of way you want to slice and dice the market, there's an index fund out there that matches the performance of that sector.
What are 'exchange-traded funds'?
Exchange-Traded Funds are fairly new and they've become super popular lately. It's basically an index fund where it's a basket of securities that this exchange traded fund holds. But it's not a mutual fund. With a mutual fund, each day you can buy and sell it at the end of the day. With an exchange-traded fund, it trades like a stock, meaning throughout the day the price is actually fluctuating, so you can buy and sell and buy and sell and buy and sell throughout the day.
What are the advantages and disadvantages of the 'involved' investment strategy?
The involved investment personality, and the strategy for the involved investment personality; it's nice because it's between the hands off and it's between the consumer. It's right in the middle. The advantages are that you have a little bit more control, a little bit more flexibility, and really, really low costs because you're using index funds. With index funds, they're super inexpensive. Those are the advantages. The disadvantages would be that, because you're an involved investor, it takes a little bit more time. You actually have to create the asset allocation. You have to figure out "Do I want to put 30% into U.S. companies and 20% into international? Or do I want the reverse?" So that takes some planning, that takes some research. At the end of the day, that's pretty much the disadvantage. But if you're an involved investor, you kind of like that anyway.
When should I rebalance my portfolio in an 'involved' investment strategy?
If you're an involved investor, you'll want to avoid rebalancing too often. The best strategy is to look at it every six months or so and to take a look at whether you need to rebalance back to the original asset allocation. Or, based on your research, you might want to shift the allocation on purpose - maybe overweight one asset class and underweight another.
