Investing Made Easy – A Simple Guide + Free Download

Investing Made Easy – A Simple Guide

As I stated in an earlier post, the 5 Big Secrets of Investing, many in the investment industry want to make you believe that investing is complex and difficult. If you want it to be that way, you can have a whale of a time making things complicated and difficult. However, I know from my experience as a former investment professional, that investing can also be as simple. And in fact, the simpler the better. The more simple your approach, the better are your chances for maximum return and minimum risk.

This guide will teach you some basic investing principles and it will instruct you how to invest your money in the simplest way way possible.

The Simple Investing Process

First Things First: Asset Allocation

What is Asset Allocation ? Asset Allocation is finding the right mix of foreign and domestic assets classes: stocks, bonds and cash for your portfolio. By investing in many asset classes and many securities within each asset class, using mutual funds, you are spreading out the risk that any one poor performing security or asset class will badly damage your portfolio. Simply put, your overall risk is drastically reduced.

Why Asset Allocation? Gary Brinson, a money manager and a finance author conducted a study in 1986 and also in 1991 which analyzed a group of pension fund managers to determine what caused differences in their results. What he found is that over 90% of their differences could be explained by the asset allocation they chose. This meant that both security selection and market timing accounted for less than 10% of their differences.

Here’s a notable tidbit that will should instill some confidence: If over the past 10 to 20 years you had held a portfolio of 25% of the following indices: large US stocks, small US stocks, foreign stocks and high quality US bonds, you would have outperformed over 90% of all professional money managers and with significantly less risk.  What could be easier than picking four index funds, investing equal amounts in each, and letting them sit for 10 years?

Another Reason to Use Mutual Funds: Diversification

Diversification is having a broad mix of securities in each of the asset classes in which you invest. It also means having a broad coverage of all the different sectors of our economy. How broad is broad enough? Generally speaking, the broader the better for spreading out risk, but a good guideline is to have a minimum of 25 securities per asset class. The easiest way to achieve this is through mutual funds.

Why use diversification? Simply put, if you have a small number of securities in your portfolio and if one of those securities performs poorly its impact on your portfolio is felt more strongly than if you had a greater number of holdings. The same is true with sectors of the economy.  The less securities you have the more one of them could heavily impact your overall results.

Finding the “Right Mix” for You

You will need to examine your personal Investment Profile. This includes the following:

  • Your risk tolerance – how you feel about potential fluctuations in your portfolio and how much you can financially withstand.
  • Your time horizon – how much time you have before you will need the money that you are investing.
  • Your goals – what do you want your money to do for you? (retirement, home, large purchase, education, etc)
  • Your income, job status and tax bracket – how much savings you should have as opposed to investments, and what type of fixed income securities should you invest in.

This is the easiest way to determine your optimal asset allocation based on your personal investment profile is to use this asset allocation calculator.

Go to this calculator, fill in your information, and print out the one page “report.”Â

Using Index Funds

For the core of your holdings you should consider using index funds. Why? Because your risk will be lowered by the high level of diversification, you are likely to perform better than 80%+ of managed funds in any given year, and your fees will be significantly lower making it easier for you to profit from your investment. If you are a new investor, the best book you can read is John Bogle’s “The Little Book of Common Sense Investing.” John Bogle is the founder of Vanguard, and his facts and clear writing give you everything you need to know about keeping investing simple and maximizing your returns while doing so.

Investing 100% of your holdings in index funds is simplest and best, but if you want to try to pick some managed funds, you can do that too. The more you can put into index funds the better.

Using Asset Allocation and Balanced Funds

If you have less than $5000, you may want to consider an asset allocation fund or balanced fund that uses indexing strategies. Balanced funds hold set percentages of several assets classes whereas asset allocation funds hold several asset classes but the percentages are managed according to market predictions. Usually both types come in flavors such as “Aggressive,” “Moderately Aggressive,” “Moderate,” and so on. Which is best? Balanced funds have outperformed asset allocation funds so far over time.

Using Managed Funds

If you want to add a little more excitement to your portfolio you can include managed mutual funds. This will increase complexity for you, increase risk, and also give you the potential to either over or under perform the market. With index funds your return will always be in line with the underlying markets which your index funds follow.

If using managed funds, determine what percentage you want to put into index funds and how much into managed mutual funds. Be sure to pick no-load, low expense fee funds, with no transaction fees. Here is an article by Motley Fool on choosing a mutual fund. Try not to pick the “hottest” fund because often those funds tend to get flooded with cash and find it difficult to keep up super high returns. Instead look for long term steady performers, say in the 5 and 10 year performance categories.

Picking Your Mutual Funds

Here is a list of mutual fund marketplaces from which to choose. This is not an exhaustive list, but it has the major players. If I’ve missed one, please let me know.  I suggest choosing just one for all your needs. Most offer free mutual fund research. Once you open an account you can use their screening tools to choose your funds. If you want to screen for funds before opening an account try Morningstar’s Fund Selector which is free.

Vanguard – Great for index funds. Ultra low fees.
Schwab – Good for index and managed funds. Good service. Portfolio tools. Account minimum: $2500. Excellent research.
Fidelity – Good for managed funds. $2500 account minimum.
TD Ameritrade – $2000 account minimum. Large mutual fund selection, low interest on cash,  lower service relative to peers.
E-Trade – $2500 account minimum.
Scottrade – $500 account minimum. Basic services only.
FirstTrade – No account minimum. Only basic account features. Smartmoney ranking: #3 out of 8.

Source: Click here for a free report comparing 12 online brokers by Broker Advisor.

Choose a brokerage firm and open an account. These days many offer online account opening, and you can always fund it with either a wire or ACH to speed up the process.

Allocating Your Money to Your Mutual Fund Picks
MutualFundAllocation Tool – Excel Worksheet Template


Steps to using the spreadsheet:

  1. Fill in Amount to Invest – upper right hand corner.
  2. Fill in Allocation Percentages for the asset classes (Large Cap, Mid/Small Cap, Int’l, Bonds, Cash, Other.) You’ll get these from using the asset allocation calculator. Check that the total at the bottom equals 100%.
  3. Fill in your mutual fund choices: Name, Symbol, Fund Category. Each asset class has room for up to 5 mutual fund choices. I don’t recommend choosing more than that. 1-3 choices per asset class should be sufficient. If you need to increase this then you’ll need to modify the spreadsheet, which could throw off the calculations so I don’t recommend doing that unless you are proficient at Excel.
  4. For each asset class divide up the percentage across your fund choices for that asset class. Example: Say 30% is going to Large Cap and you choose 1 index fund and 1 managed fund, divide up that 30% between the two, such as 15%/15% or 20%/10% etc. This is filled in under column heading “Percent of each asset class.” Note that the 2 totals should equal each other. They are color coded to make it easy to check. Final Check that all totals add up to 100% at the bottom
  5. Dollar Amounts should calculate automatically. Check to see that the total equals your original Amount to Invest that you filled in at the top of the sheet.
  6. Optional- Rounding or changing dollar amounts. If you prefer rounder numbers, feel free to adjust your dollar amounts in the “Rounded Optional” column. The percentages will automatically fill in.
  7. Double check all totals.
  8. Use this sheet to refer to when placing your mutual fund orders with your fund marketplace provider, (brokerage firm).
  9. Check the Example Chart sheet to see what it looks like when filled in.

Automate Your Investing

Once your portfolio is set up, if you can afford it, set up an automatic investing plan with your brokerage firm. You can usually do this all on one application or you can probably sign up for this online now. Even a small amount invested regularly will make a huge difference in the growth of your portfolio. You’ll be dollar cost averaging which is investing a set amount at set intervals of time. This will likely result in a lower overall cost basis of your investment. And with automatic saving you won’t miss the money. This is well worth the small amount of time it takes to set this up.

Maintenance of Your Portfolio

Review your portfolio quarterly, especially if you have chosen managed funds or other types of investments such as specialty funds or stocks. Do a major review of your portfolio once a year which will include using the asset allocation calculator again. Many things can change in one year and, often, so should your allocation. At the year mark, you’ll want to switch out any under performing managed funds for either index or other managed funds.

Keep in mind that with index funds you should continue to hold them according to your asset allocation. Don’t be tempted to sell the index funds that are doing more poorly to put into the top performing asset class. If you do this you will be taking a loss and probably the hot asset class you choose instead will quickly cool because that’s what everyone else will be doing. As long as your hold your index fund, you won’t realize a loss unless you sell it. So hold on and stick with your asset allocation. The only caveat is if market fluctuations keep you from sleeping. If that’s the case then you probably need to redo your overall asset allocation because your risk tolerance is actually lower than you originally estimated.

If you have major changes in your life such as marriage, children, inheritance, new financial goals or other changes, this is another time when you should reassess your asset allocation and your overall portfolio. The nice thing is that if you are using index funds exclusively, this process shouldn’t take more than 1 hour to complete. Not bad, huh?

Keeping It Simple

In order to keep your investing simple, I recommend steering clear of investment news. Yes, you heard that right. By watching the investment news this will tempt you into the world of “sexy complex investing” which is ultimately a fool’s game for most. It will make you feel like you are “missing out” on something big. As I stated in my post on investment secrets, choosing individual securities, such as stocks, is very difficult to get right. 80% of mutual fund managers are not able to meet their benchmark index! So how can anyone hope to beat that in their spare time? Maybe you can, but in that case you’ll have your work cut out for you along with the odds stacked against you.

Simple investing is best. The only thing difficult is avoiding the temptation for adding complexity. If you absolutely can’t resist, I recommend doing it on a very small scale, such as just one stock. Or better yet, try some online investment games before using your own hard earned money.


I have assumed that you have your “safety net” in place. Your “Safety Net” is cash or insurance that you could use to support yourself and your family if you lost your job. If you don’t have this you should consider building up this emergency cash reserve first before investing. To determine how much, think about how much you would need if you were out of work for 6 months. Consider all sources of income. To find a good rate on cash check out The Massive Personal Finance Resource List.

The second assumption I’ve made is that you are familiar with all the terms in this article. If you would like to see a post with the definitions and explanations of basic investing terms, let me know and I will put that together.

A Final Recommendation

Again I want to reference John Bogle’s book, “The Little Book of Common Sense Investing” as a must-read, especially for new investors, but also importantly for old hat investors. I think you will find the arguments for simplicity in investing to be a huge relief! Investing not only CAN be simple, but it SHOULD be simple for optimizing your returns! This is one area of your life where it actually pays to take the easy way! 3 Cheers for that!

Your Investing To-Do List

  1. Make sure you have your 6 month emergency fund set.
  2. Choose your asset allocation using this calculator.
  3. Choose a mutual fund marketplace provider, (brokerage firm).
  4. Choose your mutual funds.
  5. Download the Mutual Fund Allocation Tool – Excel Template
  6. Enter your asset allocation into the spreadsheet.
  7. Enter your mutual fund choices into the spreadsheet
  8. Place your mutual fund orders.
  9. Set up Automatic Investing Plan.
  10. Review your portfolio quarterly (quick) and yearly (1 hour).
  11. Read John Bogle’s book, “The Little Book of Common Sense Investing” Check with your local library. They should have it if you don’t want to buy it.
  12. Tune out investing news for the most part. A little here and there is ok, but remember to stick with your plan! Don’t be tempted by the investment sirens! 🙂

Please share your comments, experiences, and tips. All comments big and small are very welcomed!


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