With $500,000 to invest in stocks, most investors would be tempted to try picking individual stocks or hiring a financial advisor to actively manage their money. However, the evidence shows that a passive, diversified approach using low-cost index funds consistently outperforms active stock picking over the long run. By avoiding the urge to tinker and keeping costs low, an investor can set themselves up for long-term success. Some key steps to take include:
Diversify across asset classes
A diversified portfolio should include exposure to stocks, bonds, and other assets like real estate. For the stock portion, consider allocating to US, international, and emerging markets. This provides broad diversification and takes advantage of growth opportunities outside the US. Bonds help manage risk and provide income. Other alternative assets can further diversify.
Diversify within asset classes
Owning index funds that track the broad stock market provides instant diversification within stocks. For example, a total US stock market fund holds thousands of individual stocks. Sector funds that invest in specific industries can complement a core holding in broad market index funds for some added diversification.
Use index funds and ETFs
Index funds and ETFs provide instant diversification at low cost by tracking market indexes. The funds spread money across hundreds or thousands of stocks and the fees are extremely low, often less than 0.10%. Compare this to actively managed mutual funds charging 1% or more. Index funds reliably generate market-level returns minus their minimal fees.
Rebalance periodically
Over time, some assets in a portfolio will outperform others, causing the allocation to shift. Rebalancing by selling assets that have increased and buying those that have decreased gets the mix back to the target. This is a form of buying low and selling high that helps manage risk.
Keep costs low
From expense ratios to commissions, investors pay for every cost in a fund or portfolio. Controlling costs is one of the best ways to boost long-term returns. Index funds and ETFs keep costs at a minimum, ensuring more money stays invested.
By using low-cost, diversified index funds across asset classes and rebalancing periodically, investors with $500k can setup a simple, passive portfolio positioned for long-term growth. Avoiding the temptations of stock picking and market timing is the surest path to investment success.