bluecollardollar: on investing with caution

on the radio with Paul Petillo

books by Paul Petillo

I just published my fifth book - this time with Smashwords! ReBuilding Wealth in a Paycheck-to-Paycheck World by Paul Petillo, copyright 2011 This ebook is available across all platforms including iPad and iPhone, Amazon and Sony.

on personal finance

In the world of personal finance, asking what's the worst that could happen is not the same as asking: "will I be able to afford this?" or "have I saved enough for retirement?"
More personal finance

on retirement

If things are good, for some they won't be good enough. If it turns out that things are not so good, someone will ultimately benefit for this off-chance negativity.
More on retirement planning

on mortgages

American dream or not, the games you may have once played with financing your home are not available for the vast majority of homeowners.
More on mortgages and homes

on insurance

Is the insurance industry the next victim of the financial crisis?
Health Channel

on investing

The mutual fund investor has a great many more options available to them in the post-Great Recession marketplace. The question is: are they right for you as you make a retirement plan using 401(k)s or IRAs?
More on investing

WWW BlueCollarDollar.com

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on caveat emptor

It is no easy task. The "they" in the suggests above include everyone that is a student of investing. They may include professionals ranging from hedge fund managers to the person placing an order with a broker via smart phone. "They" includes people like me, writers who ply the complicated waterways of retirement planning, financial planners who seek to guide you in the process that resembles a flashlight journey through a dark house, and of course, the academics who study every nuance of our behavior looking for something in which to pin a bias on a reaction. "They" can make a lot of noise.

And each the "they" implies that you should know what caveat emptor really means. Beyond the simplistic Latin translation of "let the buyer beware" is suggests that you, the purchaser know that your rights after-the-fact are not always protected. The merchant is responsible to sell goods that will suit your "ordinary purpose". Which should lead you to ask: what is the "ordinary purpose" of investing?

So with all of the information available, how do you build a portfolio that will provide you with this "ordinary purpose"? You could buy only index funds. Beyond all arguments, index funds do three things that no other form of investment can.

One: They provide risk. In the selling of index funds, you have been told that they have the least amount of risk. They are diversified across a large number of investment types, allowing the investor in index funds to spread the risk. This doesn't mean the risk is no longer there; it is simply reduced. Because not all index funds are created equal, the risk increases with each fund investment that specializes beyond the largest companies (the S&P 500). The more drilled-down the index, the greater the potential that you could see increased risk.

Two: They cost almost nothing. The impact of fees on any investment acts like a drag on returns. The higher the expenses in a fund; the lower your return. While actively managed mutual funds can and sometimes do beat the indexes they benchmark themselves to, you need to subtract the cost of that investment against the return. The low cost of this passively invested fund type keeps the price so low that the comparisons become inarguable. Index funds are cheap.

Three: Add in the low cost and the lowered risk and you can build a portfolio that has both. Five types of index funds in a portfolio can serve the "ordinary purpose" you seek. The obvious first choice is an index pegged to the 500 largest companies. The next 400 in size can be captured in a mid-cap index fund. Although you may think a small-cap fund suggesting 2000 small companies actually holds 2000 securities - they don't. But they hold the companies that are the most liquid (enough shares on the open market to trade without causing huge price fluctuations). An index pegged to the international or global or even an emerging market index would provide additional risk and more importantly, diversification. Add in a bond index and you have achieved an "ordinary purpose".

Am I getting off easy by simply suggesting portfolio of index funds? Quite possibly. But you will have made enormous strides in your own financial education in the process of building that kind of portfolio. You will think more out what you are doing and in the process become a better investor.

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