Passive Mutual Fund Investing With Index Funds

After you become a successful spot forex trader you can learn to invest your profits with lower risk and this will keep your asset base growing.

Summary: This lesson will teach you how to set up a portfolio of passive mutual funds using low cost , low fee index funds. You leave all of the investments in place and once a year you re-balance the portfolio.

What Types of Mutual Funds Do I Use? You would use low cost and low expense index mutual funds from companies like Vanguard, Fidelity, Schwab, etc to build a diversified portfolio. They all have low cost stock index funds, bond index funds and other funds that you can use to build the portfolio. To put together your investment portfolio you can use index funds, or no load funds, with no sales charges. Mutual fund families you can use to get started are Fidelity and Vanguard, several other fund families would work and possibly some ETFs would also assist.

Basic Portfolio Mix –The basic portfolio mix would be 50% stock index fund and 50% bond index fund. This is the Couch Potato Portfolio, you rebalance it once per year. A mix like 60% stocks and 40% bonds is also commonly used.

Why would you use the basic mix? – When stocks rise bonds drop and vice versa. It forces you to sell profitable market shares and reinvest in what is down. Blue line is stock index fund, when it drops the bond index fund rises and you can sell profits and buy other shares cheaper, creating and all weather portfolio.

Other Mixes – Take the basic 50/50 mix, but add small amounts, say 5% of commodities mutual funds, international stock index funds, real estate index funds. This is the coffee house method.

How often do you rebalance? Once, twice or possibly three times per year. Just take the total assets and make sure the percentages are at their target. This is somewhat passive or nearly passive investing.

Why Does the Couch potato and Coffeehouse method work? When one asset class rises it forces you to sell some when you rebalance. It also forces you to buy cheaper sectors. For example when real estate sold off in 2008 it sold off hard but it has returned to prior levels and all of the shares you bought back then when they were cheap have risen. The long term track record on any mixture is available for the last 25 years. In the 2000-2002 bear market the track record is a 6% loss on the couch potato portfolio versus a 50% loss on S and P 500 index alone and an 80% loss on Nasdaq versus the 50/50 mix. This is because bonds rise fast in down stock markets offering protection and income. Like a hedge.

You keep selling profits and buying cheaper stocks or sectors.

What type of Accounts – You can use the stock and bond mixture with individual non retirement account, IRA and many 401k plans. You can use equivalent mutual funds for your 401k under your 401k plan but most 401k plans have more limited choices. Profitable forex traders need to take the excess money out of their forex brokerage accounts and invest the money properly for the long term.

Web Resources and Acknowledgements Scott Burns - Developer of the couch potato portfolio 50% stock 50% bond portfolio and syndicated financial columnist. Long term track record is published.

http://www.dallasnews.com/business/columnists/

Coffeehouse Investor – More diversification into other sectors, like small percentages in real estate or commodities index mutual funds, more diversification, long term track record is also published.

http://www.coffeehouseinvestor.com/

Disclaimer – This lesson is for informational purposes only but the long term track records of the couch potato method and coffeehouse investors are available and published.