Where Index funds belong in your portfolio

The core of your portfolio should be a total stock market index fund or S&P 500 fund. This fund is relatively stable and won’t drop as much as some individual stocks. You could include utility stocks and communications stocks in this category as well, but these large cap index funds are composed mostly of large cap growth and value stocks with blue chip stocks contributing as well. These index funds should compose 25 to 75% of your portfolio. This means if your portfolio is composed of over 75% index funds then your portfolio may be too conservative and if your portfolio is composed of over 75% individual stocks and under 25% index funds then your portfolio may be too aggressive. Your risk tolerance of course plays a big factor in your asset allocation. My brother for instance has his portfolio in 100% individual stocks and that fits his risk tolerance. I myself like to stay within the ranges mentioned above and I’m currently in a 50/50 Stock/Index fund mix.

What individual stocks you chose to own is up to you, but I’m a big fan of the recommendation made by Ian Dunlap to have 2 technology stocks and 2 index funds in your portfolio. I would of course implement the 25/75 strategy with this. The 2 index funds I would use would be a large cap blend fund, like a total stock market index fund and a small cap value fund. The 2 tech stocks can be whichever 2 FANG or blue chip stock you like the best or believe in the most with good fundamentals. For instance, you can have 25% in 2 technology stocks and 75% in the 2 index funds. The individual stock part of your portfolio can also be whichever 1-2 stocks you truly believe in with good fundamentals that you can hold on to for 10 or more year through the inevitable ups and downs of the market.

Someone in retirement may consider adding bonds to this mix and have the bonds replace the individual stocks, especially if you have a sizable nest egg with little concerns for running out of money in retirement.

Published by The Fire Investor

Financial Independence hobbyist offering practical wealth building advice for all income levels with a focus on achieving early financial independence.

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