To create a portfolio, you have to make many decisions.
You can use low-cost ETFs, or you can use low-cost index funds. Or you could use low-cost actively managed funds like Vanguard’s Wellington Fund or Wellesley Income Fund.
You can use a moderate allocation that stays fixed over time (say, 60% stocks, 40% bonds), or you could slowly shift your allocation to become more conservative over time.
You can use a “fund of funds” that is a diversified portfolio all on its own (e.g. Vanguard’s LifeStrategy funds), or you can save some money by taking a do-it-yourself approach with individual funds.
You can use a Treasury fund for your bond allocation, or you can use a Total Bond Market fund. Or you could construct a bond ladder from individual TIPS.
You can overweight small-cap/value stocks, or you can stick with a “total stock market” approach.
And the list goes on from there.
I think it’s worth discussing these topics, because you do have to make choice about each of them in order to create and implement an investment plan.
But I sometimes worry that I encourage you (readers) to get caught up in minutiae here on the blog. The reality is that either answer to any of the above decisions (as well as many more that I didn’t mention) is likely to work out just fine. There are an infinite number of reasonable ways to invest.
The Trick is to Avoid the Big Mistakes
From what I’ve seen, most investors’ success (or lack thereof) is determined primarily by whether or not they’re able to avoid the big investing mistakes — things like:
- Holding a large portion of your total net worth in any one stock (especially your employer’s stock!),
- Bailing out of the market after big crashes,
- Getting involved with daily trading of individual stocks, foreign currencies, commodities, etc.,
- Paying a sizable commission every time you invest, only to invest in funds that have high ongoing costs as well,
- Listening to certain personal finance “experts” on the radio when they say you can safely withdraw 8% from your portfolio every year throughout retirement, or
- Not getting started investing until late in your career.
If you get all the big stuff right, you can get many of the small things wrong and still do just fine. Conversely, one big mistake can easily outweigh any incremental gain from having a precisely-tuned asset allocation or shaving a tenth of a percent off your average investment expenses.