Is it a good idea to invest all of my portfolio (100%) into an index fund? Something like SPY or from vanguard?
In the past Warren Buffett has advised a strategy of putting 95% of your money into the S&P 500 and 5% into treasury bonds. So the idea of putting all your money into an index fund such as the S&P 500 is not such a bad one.
However, your choice will also depend on your circumstances and your goals.
Over a long period of, say, 20 years you are likely to come out ahead with this approach and you should earn a return similar to the long term historical annualised return of stocks which is around 7-8 per cent.
However, bear in mind that stocks are near record highs and timing counts for a lot.
The difficulty is that stocks are volatile so they could also go down 20, 30, 40 per cent at any time. So if you don’t have 20-30 years to wait then it’s prudent to alter your allocation percentages to include some bonds or perhaps some other asset. (These can also be invested in using ETFs).
A rule of thumb is to minus your age from 100 and use what’s left over as a guide for how much to invest.
For example, if you are 60 years old, you would put 40% of your assets into stocks and 60% into bonds.
30 years old, you would put 70% into stocks and 30% into bonds.
80 years old, you would put 20% into stocks and 80% into bonds.
It also comes down to your risk preferences and skill level.
Obviously, I write a blog about trading strategies so my own allocation preference is much more risk-orientated.
I like the idea of a barbell approach which is to have some of your portfolio in very high risk assets and some of it in extreme low risk assets.
It pays to be cautious at first until you build up a level of confidence.
You could for example, put 90% of your portfolio in index funds and 10% into short-term trading methods. When you have success you can scale that up to closer to 40% or 50%. Again, it is an individual choice.
If you are not committed to trading at all then a passive approach with index funds is a good choice.