Choosing the right investments can seem complicated — you need to balance large-, medium- and small-cap funds, as well as growth, value and balanced options. And then there are bonds, alternative investments and even cash.
Fortunately, an investing expert, Noah Hamman, has a solution. He’s the CEO of AdvisorShares, an investment firm with over $815 million in assets. AdvisorShares offers 15 actively managed exchange-traded funds, including stock, bond and thematic funds, as well as multi-asset offerings, according to Business Insider. Hamman came up with a short list of investments that will provide a diversified portfolio that anyone can use.
Here’s what you need to know about these investments that equal the “perfect portfolio” and how you can invest in them.
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Exchange-Traded Funds
Hamman recommended exchange-traded funds or ETFs. According to Investor.gov, ETFs are similar to mutual funds in that they consist of a portfolio of investments. ETFs can be actively or passively managed, meaning that they may have a portfolio manager who buys and sells positions in the fund to maximize returns (active) or they may simply mimic or track, an index like the S&P 500 (passive).
ETFs trade on exchanges at market prices and can be less expensive and more tax-efficient than mutual funds.
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Buy an S&P 500 Index Fund
The first fund that Hamman recommended is the SPDR S&P 500 ETF Trust (SPY). This ETF tracks the S&P 500, which is the index most analysts look at when determining the health of “the market.” There are 500 leading U.S. companies on the S&P 500 and it has returned about 100% over the past 5 years, per Yahoo.
Buy a Global Stock Fund
The S&P 500 includes only U.S. stocks and investors should have some international exposure as well, according to Hamman. He suggested purchasing the iShares MSCI EAFE ETF to broaden your investing horizons. This ETF is made up of 900+ companies, mostly large and midsize, which are based in Europe, Australia and the Far East (Asia).
Buy Bonds
A diversified portfolio should also include bonds, as they often move in the opposite direction from stocks. The bond ETF that Hamman recommended is BlackRock’s iShares Core US Aggregate Bond ETF. This fund tracks a U.S. investment-grade bond index.
How To Create Your Perfect Portfolio
Now that you know the three investments you can buy to diversify your portfolio, it’s time to buy. It’s not quite as simple as putting a third of your money in each of these three ETFs, but it’s not difficult either.
The amount you’ll want to invest in each fund will depend on a few factors, including your goals, your age and your tolerance for risk. First, consider your investing goal. Are you investing for retirement? For the short term? Or just to see how you can do in the market? Then factor in your age. If your goal is retirement and this is your entire nest egg, you may want to be more conservative, particularly if retirement isn’t far off.
If you’re younger — say, in your 20s or 30s — you’ll have more time to make up any losses, so you may be able to take more risk. Your portfolio can be more aggressive than that of someone who is 50 or 60.
The third factor is how much risk you can tolerate. Some people can invest and then walk away, only checking their account balance when a quarterly statement comes in. They know if there’s a dip in one of their positions, it’s likely to come back eventually. Others check their accounts every day and get concerned if their balance is down. The former is comfortable taking more risk, while the latter should take less risk if they want to sleep at night.
Of the three types of ETFs that Hamman suggested, bonds tend to be the least risky. Next are U.S. stocks and then global stocks. Consider this when deciding how much to invest in each fund. Then watch the performance and adjust as needed.
Hamman’s suggested funds offer easy diversification and are a good introduction to the market for a beginning investor. Once you have some experience, you may want to branch out to other kinds of investments. Or if you’re pleased with the performance you’re getting, you can always stick with your diversified portfolio of three investments.
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This article originally appeared on GOBankingRates.com: 3 Investments That Equal the ‘Perfect Portfolio’ — and How Anyone Can Invest in Them
