The validity of your concept depends what you mean by ‘eggs in one basket’. If you invest in a single total stock market index fund, you are diversified as you can possibly be wrt to the risk of individual stocks. You’ll have no fewer ‘eggs in one basket’ in that respect if you instead buy five funds investing in either the whole market, or different sectors of the market. In both those cases you will have diversified away the risk of a particular stock or few stocks doing very badly, or one active manager making a very bad selection of stocks. In neither case do you avoid the risk of the whole stock market doing very badly. That risk is the reason you might expect ~6 or 7% return on stocks (just IMO), instead of ~2% (a known fact you can look up) on the very best yielding 5 yr FDIC insured Certificates of Deposit. You must accept that risk to hope to the get the higher return.
If instead you mean by ‘eggs in one basket’ the risk that a fund or account affiliated with a company like Vanguard or Fidelity is going to defraud you, that is a risk you can diversify by having more than one fund/account. However I would argue that’s a negligible risk with such outfits. A similar approach to risk on travel would mean not travelling (since you can’t diversify and fly on multiple airlines and only lose part of your life if they crash, you have to accept a 1 in millions chance of dying in a crash, or not fly).
And I think your point can obscure a more important one. Contrary to the whole stated raison d’etre of the fund industry, actively managed funds and sector funds do not add as much value as the typical extra costs, both in ‘expense ratio’, the fees of the fund you can see, as well as hidden costs due to more transactions (bid-offer spreads and commissions: fund literature does not include those costs) and tax effects (delaying capital gains recognition in index funds because they hold stocks longer).
There aren’t many absolutes in finance and investing, but one that’s close to absolute is that retail investors are better off owning total stock market index funds, particularly with Vanguard, as their ER’s are lowest, but some other low cost funds are close nowadays. Actively managed funds and sectors funds will prove inferior in the long run on average, because on average you won’t win in picking better stocks, but the fees will tend to be higher. But once that’s understood, then OK if one is very sensitive to the risk of fraud, even at large institutions with impeccable reputations, you could split your total market stock index funds between a Vanguard one and a Fidelity one. I don’t think it’s worth the trouble to do that, but I can’t say it’s wrong per se.
The most important question that no one is asking so far…what is this money for?
Is this retirement money? Emergency money? Money to leave to your kids?
Focusing on your specific return is misguided. What are your goals? Different vehicles are better suited to meet your goals. Until an adviser knows your goals anything they tell you is nonsense.
When looking for an adviser look to talk to someone who is able to work with multiple companies and is familiar with multiple types of investing. Someone who understands market investing is good, but they should understand how annuities and life insurance work as well. I would look a bit sideways at anyone who brags about being a CFP, but people who have a series 6 or 7 or a ChFC or CLU or CFA are probably good. A good adviser doesn’t need to have any of those, but a lot of them brag about their credentials. Interview your adviser the way you might interview prospective doctors. Don’t just hop into bed with the first one that comes along.
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I’ve owned AT&T for years. Nice dividends. But is a flat, non-volatile stock. It doesn’t get 5% gains every year.
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AT&T has historically been a “widows and orphans” stock, meaning it doesn’t appreciate wildly, but neither does it tend to lose value over time, and just sits there simmering away, making a steady dividend.
It’s been said that Warren Buffett is the ultimate “orphan.” Follow what he buys and holds, and there’s a good chance you can build a portfolio of stable stocks that just quietly crank out dividends.
Well you could, in terms of quantity. But owning a single share of BRK.A would screw up my diversification And it doesn’t pay dividends and isn’t a growth stock any longer, so I’m not going to buy it for sentimental reasons.
Utilities and energy stocks tend to be good for that as well. Oil companies are volatile if they have a huge spill, or oil goes way down per barrel, but they tend to pay good dividends and they always come back - and will until the energy market is disrupted. Its probably one of the few stocks where a case could be made for timing the market (guess when I bought my BP?)
Warren’s had a lot of success over the years, but he doesn’t buy stock, he buys companies. That makes a difference. The last time I looked about 60% of Berkshire Hathaway holdings were in just four companies . That’s a lot less diversification than I’m looking for.
The stock of the company that called itself A&T for much of the 20th century was called a widows and orphans stock, but that company broke apart and the remnant called AT&T crashed quite spectacularly around the turn of the century.
Many of the AT&T spinoffs and the remnants of the company that was once called AT&T were acquired by SBC Corporation (which, ironically, was an AT&T spinoff itself). SBC renamed itself AT&T. I’ve never heard of SBC, now known as AT&T, referred to as widows and orphans stock.
This is true, and the way that they should demonstrate that understanding should be that with a few significant exceptions (term life for the benefit of your dependents, a single-premium immediate annuity for longevity insurance, etc.), they will recommend against life insurance and annuities. Insurance is important, but most products that mix “insurance” features and “investment” features are confusingly complex, by design, to conceal the fees.
If you hire a financial advisor, understand where he or she promises in writing to act only in your best interest (i.e., as your fiduciary). Most financial advisors will be unable to do this, and will probably have a very convincing explanation for why what I just wrote is wrong and will ruin your life. A few will be able to do this. They will probably charge high hourly rates, similar to an accountant’s, but the net cost will almost certainly still be cheaper. A Series 6/7 isn’t necessary if the advisor just gives you advice and you make the investments yourself at a discount brokerage (Vanguard, Fidelity, etc.), and that’s the best model. With only $100k at stake and some time to research this yourself, I don’t think an advisor is necessary.
A portfolio of a dozen individual stocks in different industries might not be terrible, if you buy and hold and resist the urge to trade (unless you can convincingly explain what you know that the market doesn’t, and that explanation isn’t “insider trading”). It’s more trouble and transaction fees than a low-cost index fund, for less diversification.
Yes, I know, very large holdings. Berkshire Hathaway owns close to 10% of the outstanding stock in each. Over 15% of the stock in American Express. Over 25% of the stock in USG and Kraft Heinz. That’s what I mean by he buys companies, not stocks, it was a metaphor.
Buffet would recommend buying an s&p 500 mutual fund and holding it for 20 years. He has even placed large bets that this will out perform the best hedge funds. That said, it really comes down to why you are investing and what your time table looks like.
None of this is wrong. Similarly, it’s also neither unbiased or universally true. The best answer the OP can possibly get without giving us all a lot more information than they are likely comfortable with is “it depends”
That’s disappointing and makes for a bad thread, but it’s true.
I’m rolling my 401k over into an IRA in the next couple of years. My plan is to put it in four different index funds.
40% in VTSAX, a total stock market index
20% in VTIAX an international stock market index
30% in VBTLX a bond market index
10% in VGSLX a real estate investment trust index
All of them are Vanguard funds with low expense ratios. I’ve had a portfolio of around 40 individual stocks as well as some Fidelity funds that have done pretty well over the last 15 years, with an average annual performance of 9.25%, but as I age I realize that I’m at risk of losing some cognitive ability and people in their late sixties aren’t known for nimble decision making. I’m not sending money to Nigerian princes or anything, but what was I thinking with those palladium stocks?
It’s relatively easy to make money in the market if you have income coming in so you can buy with both hands during a downturn, but once you’re retired you’ve got to be more cautious.
We’ve had a good experience investing around $150k in mid-risk, diversified mutual funds. Over the past three years it has yielded around $30k in dividends (which we pulled out as cash for home renovations). YMMV.
Our Wells Fargo investment adviser handles the money; we recently met with him and switched to a new strategy wherein yields may be slightly less, but loss is also less (I think its called a WBI or somesuch – let me know if you’re interested and I’ll look at my paperwork).
I only partly agree. I think a general method of investing is clearly superior to others: do it yourself investing in a few broad based low cost mutual funds.
A number of other suggestions which have been made might not be outright wrong in 100% of cases, but are inferior to the above simple advice for the vast majority of people and cases. Namely, buying lots of different funds to ‘diversify’, or buying individual stocks, or paying professional advisers unless you just absolutely cannot gain a basic understanding of the simple approach. There’s loads of potential downside in each of those relative to the ‘boglehead’ approach, but not a lot of downside in the BH approach.
The only significant caveat to that I think is if by some chance this is an older person, rare on this forum from what I can tell but I suppose possible. Then annuities might be considered as part of the investment. Long deferred annuities seldom make sense for younger people. And whole life insurance as a rule is a rip off. Term life may be a necessary protection for loved ones but is not really an investment. And if a person had some pre-existing expertise to think they could do well in investments like rental real estate or a small business they presumably wouldn’t be asking. I’m assuming financial asset investments.
Then having adopted the BH approach, it’s still an open question how much risk, how much stock v bond, the investor should choose. To know that, yes, we’d have to know more of OP and goals and it could vary very widely depending. But the basic approach of a few broad based low cost index mutual funds (or ETF’s, no big difference there) is best for almost anybody who does not have an extensive background in finance, and most people who do.
The remaining caveat is again for a person who after trying to familiarize themselves with the ‘boglehead’ type approach still just cannot get their heads around it. Then a fee-only financial planner might be necessary. But IMHO if one can’t grasp that concept after some reading, and agree with it, danger lies ahead anyway at some point.
I should clarify, downside relative to the market itself. What I mean is the approach of picking single stocks yourself or paying advisers to select investments leaves you much more open to underperforming the market, and few advisers add as much value as their fees on average, so there’s just a drag there. OTOH with BH approach you get what the market gives. Of course there’s downside to any risky asset investment if the market does poorly. That’s a risk you simply have to take to get stock market like average returns: put your hand on your wallet when anyone tells you otherwise. How much of your money you’re going to leave open to that risk, and subject to that higher return, is step 2. First you have to chose the right basic approach to investing.
And it doesn’t pay dividends and isn’t a growth stock any longer, so I’m not going to buy it for sentimental reasons.