he first question an investor must ask himself is what assets to invest in. Today there is a variety of investment vehicles including stocks, etfs, mutual funds. I recommend beginners buy mutual funds and should not own stock or etfs. A beginner does not know how to chose individual stocks, and there are many dangerous etfs being highly advertised by wall street. A big advantage to mutual funds are that it allows you to dollar cost average by adding money to your account every month(or quarter) with no fee. If you start investing at a young age, investing only 100 dollars a month in a mutual stock index fund, you can retire with several hundred thousand dollars.

I am going to recommend a portfolio for people with high risk tolerance. This refers to long term investors who are far away from retirement and can stomach seeing a huge (temporary) loss of their savings. This is not an easy task. When the stock market is booming it is easy to think how great stocks are, despite their downward risks. However, when the market is crashing and your IRA is down 50% few people have this feeling. William J Bernstein compares this attitude to a pilot who practices a crash landing in Aviation training and a pilot who is actually crash landing a plane. If you did not sell your stocks during the tech crash and the most recent crash,(and better yet bought on the way down) then this article is meant for you.

For the investor who meets the criteria above, I would structure my portfolio as follow:

1. 80% stocks which have the best returns over long periods of time

2. 10% bonds

3. 10% REIT

1. Stocks

I would break down the stock structure as follow:

15% S&P 500 Index

30% large Cap Value US Index fund

15% Foreign Value Fund

10% International Stock Market Index Fund

20% Small Cap Value Index fund

10% Foreign Small Cap Value

I would not put any money into growth funds since over time, value has shown itself to far outperform growth. However, I would still put some money in the S&P 500 even though value stocks do better than the S&P 500 over time. The reason I would do this is because when growth stocks have phenomenal returns like in the late 90s if you hold the S&P 500 index fund you will be able to capture most of these gains. Small cap value have amazing long term returns and foreign small cap value have even better returns. That is why I would allocate 30% of my stock portfolio to this asset class.

2. Bonds

In general I would mostly hold long term bonds. However, in the current environment interest rates are extremely low. Long term treasuries have awfully low yields, and when interest rates rise they will decline significantly in value, I would not own long term bonds.

Tips currently have a very low yield currently. In previous years TIPS have yielded 3.5% plus cpi, and were far more attractive. For right now I would recommend That you put 45% of your bond money in a short term Investment Grade Bond Fund and 10% in TIPS.

When interest rates return to at least 4% I would recommend the regular 45% Long Term Bond Fund and 20% TIP allocation.

15% Foreign and 10% Emerging Market bond fund . Foreign bonds provides some diversification and protection from domestic interest rate risk.

10% High Yield Bonds these historically have provided excellent returns and are less vulnerable to rises in interest rates.

3. REITS

REITs have historically provided high returns and are a good inflation hedge.Investing in REITs is a good way to get some diversification from an asset class that is not completely correlated to stocks. . REITs have fallen dramatically over the several few years, and they provide high yields in the current low interest rate environment.

What I would not do

I would not put money in gold. Historically gold has returned nothing(inflation adjusted). After the huge run up in the price of gold the last several years, now is an especially bad time to enter the gold market. Therefore, Gold which is extremely volatile, and has a very poor track record, is a very poor investment choice.

Many people buy gold because gold is a good protection against inflation. However, ff you are concerned about inflation, REITs, TIPs and stocks(over long periods of time, but not short ones) should provide more than enough protection.

I would recommend opening a vanguard account or if you have a large amount of money to invest i heard that DFA is an excellent choice. I believe DFA has a $250,000 minimum to open an account. There is no reason you should pay high fees for mutual funds, and it makes even less sense to pay high fees for index funds when you can get the exact same fund for lower fees. I would not recommend putting some of your money in active managed mutual funds for beginners(except for a few funds which I recommended which have low fees and are very well diversified like Vanguard International Value fund VTRIX). But if you cant resist the temptation to try to beat the market I would recommend in particular the Sequoia Fund, Tweedy Browne , and Royce Fund.

How to allocate your money

Let us take a hypothetical case of someone looking to invest $100,000 using my above recommendations. The money would be allocated as follow:

$80,000 stocks, $10,000 bonds, $10,000 REIT

Open a vanguard and fidelity account, and invest as follow:

stocks:

12,000 VFINX 15% S&P 500

24,000 VIVAX 30% Large Cap Value Index

12,000 VTRIX 10% International Value fund

8,000 VGTSX Total International Stock Index

16,000 VISVX Small Cap Value Index

8,000 Small cap international value fund There is no index for this yet (beside DFA) so i would recommend looking at Royce funds which has several funds in this category.

Bonds

4500 VBLTX

For the rest of the bonds you need a minimum of 3,000 at vanguard and 2,500 at fidelity to buy a mutual fund, since all the bonds I recommend involve investing less than 2500 you will have to buy the etfs which have no minimums( yet have commissions). Once you reach the 2500/3000 threshold for any of the following etfs I recommend you sell the etfs and put them into mutual funds so you can make all your future purchases for free.

2000 TIPS ticker TIP

1500 internaional government bonds ticker IGOV

1000 Emerging Market Bonds ticker EMB

1000 High Yield Bonds ticker HYG

10,000 VGSIX REIT

One of the most important things for the beginning investor is to read up a little bit on investing before you put your money to work. If you read up about previous crashes and how much the market went up afterwords, or how a huge bull run in the late 90s was bound to be followed by a huge crash you will have more confidence in your investments.

Recommended Books

Here are a list of some fantastic books that I would recommend for starters. This list is in no particular order:

1. Contrarian Investment Strategies The Next Generation by David Dreman

2. John Bogle On Mutual Funds by John Bogle

3. The Millionaire Next Door by Thomas J. Stanley and William D. Danko the book gets very repetitive, but your main objective is

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