There's one guaranteed, can't-miss way to go flat broke and leave nothing behind…
It's easy; all you have to do is listen to the doomsayers and keep your money out of the markets and on the sidelines. Depreciation and inflation will take you most of the way toward abject penury, and then once you die, the taxman will come and pick over what remains. You can rest assured… he won't miss a cent.
That's the reason why "in or out?" is hands-down the most important, challenging investment decision you'll ever face; "What to buy?" pales in comparison.
So when I realized that the endless cable news debates over volatility and where stocks would go next were scaring folks onto the sidelines and into catastrophic losses, I went ahead and published an easy, one-stock investing strategy that anyone could use to make the right decision, and build their future… with just $1,000.
I call it my "One-Grand Approach to Wealth."
Today I'm going to go "one better" and show you how you can do even more with $5,000 to invest. It's just as easy, and it can be made all but totally automatic, just like my "One-Grand Approach."
But first, let me show you exactly what you're risking by keeping your hard-earned money out of the stock market.
This is as sobering as it is surprising…
How to Go from the Palace to the Poorhouse in Just 10 Days
When it comes to the stock market, it really doesn't take too many days on the sidelines to slash your wealth by more than half.
Turns out, investors can end up missing the boat very easily…
According to JPMorgan Asset Management's "Guide to Retirement," if you'd plunked $10,000 in the Standard & Poor's 500 Index at the start of 1995 – and stayed fully invested to the end of 2014 – your average annual return would have been 9.85% – and your stake would have grown to $65,453.
But if you missed just the market's 10 best days, your average annual return would plunge to 6.1%, and your portfolio would only be worth $32,665 – or half as much.
Now, here's where it gets downright ugly: Miss the 60 best days (you cash out, run to the sideline, and only reinvest after the "market outlook becomes clear"), and your portfolio actually records an average annual loss of 3.84%.
The result: After a full decade "at work" in the market, that $10,000 you'd invested would be worth… $4,570.
But of course there's another, happier side to this – one that shows the power of taking control of your own destiny.
Indeed, as I told you all not long ago, an investment advisor told a friend of mine over at MarketWatch that investors who have a plan generate an extra 1.5% a year just by "sticking with their plan."
I'll grant you that a 1.5% "difference" doesn't sound like much. But as you've just seen, over time, that seemingly tiny difference in returns can lead to a massive difference in wealth.
Over the last 25 years, the U.S. stock market has advanced at a compound annual growth rate (CAGR) of 9.3%. That's a stretch that includes the 2000 to 2002 "dot-bomb" implosion and the housing crack-up of 2007 and 2008.
Let's assume that someone who has a plan – and follows that plan – is able to extract a bit more… let's say 10%.
Someone who doesn't have a plan – or has one but doesn't follow it – ends up with 8.5% a year.
With the following three scenarios, let me show you how much of a difference, over the long haul, these "tiny" 1.5 percentage points can make.
Here's Where It Gets Good… Really Good
Since we're going to talk about what to do with $5,000, let's use that number in these calculations.
With a onetime lump sum of $5,000 – invested for that 25 years, with no additional contributions – the non-planner would end up with $38,430. The planner, with that extra "juice" that comes with working his or her plan, would have $54,200.
With that same onetime lump sum of $5,000 invested at the beginning of that same time period – but with a $100-a-month portfolio contribution added to the mix – the non-planner would end up with $140,000. The planner: $184,000.
With an initial lump sum of $5,000 – and a $200-a-month contribution – the non-planner would end up with $243,285. Not bad at all… but the planner would have a nest egg of $313,809.
The bottom line: A mere $5,000 invested today can make one heck of a difference in your future.
So let me show you just five easy-to-own stocks to buy today to make the most of this one simple strategy immediately…
Five for Financial Freedom
Just getting started is the goal here. But the advantage of starting with $5,000 – versus the smaller sum of $1,000 – is that there will be more options open to you. The extra cash will let you diversify across a broader spectrum of investment categories and reduce your risks even more.
That extra $4,000 will give you exposure to global stocks and bonds in both developed markets like the United States and European Union, and their "emerging" counterparts in places like Russia and China.
Plus, we'll add a kicker in the U.S. market that's extremely safe… and profitable.
As I noted in the "One-Grand Approach," the use of exchange-traded funds (ETFs) turns forming a portfolio into a real snap.
That easy approach calls for investing in the U.S. stock market through the Vanguard Total Stock Market ETF (NYSE Arca: VTI), and I recommend you do exactly the same with $1,000 of your $5,000 investment.
Once you own those shares, you can move on to gain exposure to the bond market as well as international markets.
And you can do it all that by staying with products offered by the Vanguard Group, giving you the safety of liquidity as well as no commissions and the lowest expense ratios in the business.
I'm recommending you put $1,000 each into a mixture of Vanguard ETFs that provide you with a balance of stocks and bonds in both international and U.S. markets.
Here's where you should put your money today:
- Vanguard FTSE All-World ex-U.S. Index Fund (NYSE Arca: VEU)
Expense Ratio: 0.09%; Yield: 3.2%; Market Cap: $23.35 billion
This ETF tracks the performance of the Financial Times Stock Exchange (FTSE) World Index in developed and emerging markets outside the United States, such as Europe (46% of holdings), Japan (29%), and China, India, Brazil, and other emerging markets (17%). It buys large-, mid-sized and small-cap stocks based on their weightings in their home markets. It's extremely well diversified. The index includes 2,394 stocks of companies located in 45 countries. Plus, it pays a healthy 3.2% yield, providing solid income while you watch it appreciate.
- Vanguard Total International Bond ETF (Nasdaq: BNDX)
Expense Ratio: 0.15%; Yield: 1.53%; Market Cap: $53.3 billion
This fund tracks the performance of a benchmark index that matches the investment return of non-U.S. dollar-denominated investment-grade bonds. It provides a convenient way to get broad exposure to bonds in foreign markets, including Europe (57.4% of holdings); the Pacific Basin, including Japan (28%); and Canada (7.4%).Virtually 100% of its bonds are rated Baa or higher by ratings agency Moody's, which means they are investment-grade, high-quality bonds that have a lower likelihood of default.
- Vanguard Total Bond Market ETF (NYSE Arca: BND)
Expense Ratio: 0.07%; Yield: 2.2%; Market Cap: $153.8 billion
This fund gives you exposure to a wide spectrum of public, investment-grade, taxable, fixed-income securities in the U.S. market. The fund's holdings including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities – all with maturities of more than one year. Essentially, this will give the same performance as a broad, market-weighted index of the entire U.S. bond market. Safety is also paramount with this fund as 100% of its bonds are rated investment-grade, minimizing the odds of big defaults. The average duration of the bonds is fewer than six years, thereby blunting the risk of rising interest rates.
- Vanguard Dividend Appreciation ETF (NYSE Arca: VIG)
Expense Ratio: 0.10%; Yield: 2.37%; Market Cap: $23.3 billion
This is the "kicker" I talked about earlier. With this fund, we add exposure to solid companies that have shown a penchant for rewarding investors by steadily increasing their dividends. This fund provides a convenient way to track the performance of stocks of companies with a track record of yearly dividend increases. The fund tracks the performance of the Nasdaq U.S. Dividend Achievers Select Index, composed of a select group of securities with at least 10 consecutive years of increasing annual regular dividend payments. History shows that, since 1926, 40% of returns over time come from reinvested dividends.
Now, Here's What to Do with the Profits
There you have it: a sensible, low-cost approach to investing made possible by Vanguard exchange-traded funds. With this approach, you have allocated your assets in a balanced manner of 60% stocks and 40% bonds, both domestic and international:
- 20% in the U.S. stock market with VTI
- 20% in both emerging and developed international stock markets with VEU
- 20% in international bond markets with BNDX
- 20% in U.S. bond markets with BND
- 20% to U.S. "Dividend Achievers," shares that increase dividends every year for at least 10 years in a row, with VIG
To keep this same asset allocation, you'll need to "work your plan." You'll need to "rebalance" your holdings at least once a year, though you can do it at any time. According to our Chief Investment Strategist, Keith Fitz-Gerald, this move lets you can lock in profits and maximize your upside potential in about 90 seconds per holding.
Rebalancing simply means, if one of the ETFs has appreciated more than another, you will sell shares from one and buy shares in the other to keep your holdings of each one at 20% of your total portfolio.
That's easy enough, but this next part is even easier…
Take the "Autopilot" Course to Riches
We've talked about this here before: The best way to get rich is to have a two-part plan. First, build a "foundation" of wealth that includes an "automated" investing plan.
Then use the "risk" portion of your capital to find undervalued stocks and shares of companies with massive growth potential that's not fully recognized by Wall Street.
The "automated" part of your wealth-building initiative works for you no matter what else you're doing. It throws behavior and emotion right out the window, removes mistakes (or lowers the chance of it, at least), and enforces discipline without trying. All you have to do is start an automatic investment plan.
Automatic saving has been around for years. Now there are tools available to help you automate investing.
The process works like this.
You can arrange for automatic withdrawals from your bank account to Vanguard so you keep investing in the future.
For instance, you could withdraw $50 or $100 each month and have it automatically transferred to your Vanguard brokerage account.
To be fair, TD Ameritrade and E*Trade also offer commission-free investing in ETFs, but you still have to select the funds.
Thing is, you won't find many, if any, ETFs with lower expense ratios than Vanguard's.
But you still have to invest those savings. So you will need to add 20% to each fund as you progress throughout the year.
Like clockwork, every month your money moves from one account to another before it's spent.
The goal is to put the least amount of resistance between yourself, your money, and your financial goals. Automatic investing does precisely that.
It only takes a matter of minutes to get started. Once you do, whether you're starting with $1,000 or $5,000, I'd like to hear how you did. Drop me a line in the space below.
Up Next from Bill: This tiny $5-a-share company just passed each one of Bill's seven stock-picking benchmarks. Now he's showing his readers exactly how to buy it before its revenue surges an estimated 4,709%. Click here to learn more…
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.