Thanks to CNBC, most people are convinced that making money in the stock market is best left to professionals. The anchors and their "expert" guests throw out arbitrary numbers, facts, and predictions with impunity.
Just because they talk circles around each other doesn't make them more successful investors! More often than not, their predictions are not accurate. The average investor doesn't need CNBC, nor do they need to know short term market predictions or which stocks may be in or out of favor.
These four rules will provide a bit of guidance to the average investor. These rules will serve to simplify your strategy while giving you returns that beat most actively managed mutual funds or brokers with "the next big idea."
1) Keep it simple. Contrary to popular belief, investors don't need to own dozens of stocks and mutual funds to be properly diversified. In fact, a handful of index based ETF's will give you exposure to the entire world. Here's a sample portfolio constructed of Index based ETF's: Vanguard Total Bond Market (BND) Vanguard Total Stock Market (VTI) and Vanguard FTSE All World ex-US (VEU).
2) Keep it cheap. Index based ETF's are best for the average investor. Index funds have no manager and invest in wide swaths of the market, oftentimes holding hundreds of stocks at a time. Two examples of the most widely quoted indexes are the S&P 500 and Dow Jones Industrial Average. When it comes to index based ETF's, Vanguard, Fidelity, and Schwab offer some of the lowest expense ratios in the business. Vanguard Total Stock Market (VTI) carries an incredibly low expense ratio of 7 basis points (0.07%). Keep in mind that the average actively managed mutual fund charges well over 1.00%, and most of them lag the market over time.
3) Invest on a regular basis. Also called dollar cost averaging, this strategy helps you to take emotion out of investing. Investing the same amount of money regularly will allow you to buy more shares when prices are cheap and less shares when prices are expensive. You'll also have no need for CNBC or investing magazines.
4) Rebalance once a year. Depending on your age and circumstances, you may want a certain percentage of your portfolio invested in bonds. One common rule of thumb says that you should hold your age in bonds. For example, if you are 60 years old, you should hold 60% bonds and 40% stocks. At the end of the year, these percentages will be out of whack because of market returns.