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Investing for Beginners – Step 2


Last week we chronicled the steps that a first-time investor should take in order to “dip a toe in the market.” We explained that Van Wie Financial has 2 goals – protecting novice investors from unscrupulous brokers and insurance salespeople, and maximizing beginners’ probabilities for long-term success. A quick review of that Blog will highlight the fundamentals, including creation of an Emergency Fund, and selecting a custodian for your money.

Today we address novice investors who have accumulated substantial funds in their investment accounts. For these people, it is time to begin the process of diversifying holdings. While there is no absolute threshold for beginning to diversify, having about $50,000 of investments should trigger the planning process, with implementation at or before the $100,000 threshold.

Diversification for diversification’s sake is not convincing, so it seems important to explain when, why, and how it should take place. In a previous Blog, we addressed the “when” aspect, so today we will address the “why.” The investing universe is comprised of 7 fundamental classes of assets; Domestic Stocks, Domestic Bonds, Foreign Stocks, Foreign Bonds, Cash and Equivalents, Real Estate, and Hedges. Most are self-explanatory, and we will deal with hedges in a future Blog.

The novice investor who has accumulated shares in a broad market Exchange-Traded Fund (ETF - see last week’s Blog for explanation) is participating only in the first Asset Class, Domestic Stocks. Somewhere between account values reaching $50,000 and $100,000, it is time to add at least one other Asset Class. This is generally done by introducing Domestic Bonds. Again, we look to mutual funds and Exchange-Traded Funds to simplify our diversification goal.

The world of Domestic Bonds is very complex, and includes (among others) Corporate Bonds, Government Bonds, High-Yield (“Junk”) Bonds, Municipal Bonds, and a host of others. Equities are owned until sold, whereas bonds are owned until maturity or until sold, whichever comes first. Most bond types are issued in differing maturities, which means the amount of time until the issuer buys them back varies from issue to issue.

Complexity in both stock and bond markets is the reason we advise novice investors to buy funds that are created and maintained by experts. There are not enough hours available in any given day for a novice to become a successful “do-it-yourself” bond investor.

Returning to portfolio diversification, the easiest way to add bonds to an existing portfolio is to allocate a portion of future purchases to a Bond Fund of the investor’s choice. While Van Wie Financial does not recommend any particular Bond Funds, we would limit Bond Fund purchases to perhaps 10% for the time being.

In coming weeks, we will be getting into the why and how of diversifying into not just Bond Funds, but other Asset Classes as well. For now (given the low interest rate environment), we suggest keeping your Bond Funds short-term, and minimal in percentage of overall assets.

Van Wie Financial is fee-only. For a reason.