How Much of Your Portfolio Should Be in Index Funds?
Key Points
Index funds are an easy, cost-effective way of being in the market without requiring constant oversight.
The percentage of your portfolio you should allocate to these funds depends on a variety of factors unique to you.
Your selected degree of exposure doesn’t need to be etched in stone. It can change as your involvement preferences do.
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If you're reading this, then you obviously have at least some interest in owning index funds like the SPDR S&P 500 ETF Trust (NYSEMKT: SPY) or the Vanguard S&P 500 ETF (NYSEMKT: VOO), which are meant to mirror the performance of S&P 500 index (SNPINDEX: ^GSPC). Smart choice. You likely realize that beating the market is not only difficult (to the point of being unlikely), but time-consuming as well. Simply owning a sizable slice of the broad market solves both problems.
The question is, how much of your portfolio should be allocated to these super-simple holdings?
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The answer, unfortunately, is a resounding "it depends." It depends on your investment goals, your interest in also holding individual stocks, and often, your risk tolerance.
Image source: Getty Images.
Here's the good news, though... there's no wrong answer. Plenty of investors have allocated 100% of their portfolio to index funds, and are not only achieving good long-term returns, but aren't feeling compelled to keep constant tabs on their investments. They're the ultimate passive buy-and-hold-indefinitely allocation.
If you just have the itch to hold a few individual stocks in an effort to squeeze out some market-beating gains, however, devoting half of your capital to index funds and leaving the other half free for when you come across a particular prospect you like isn't a bad rule of thumb either.
Just make it make sense for you
Again, there's no absolute right answer for everyone. There may be a good reason for you not to own any index funds, just as there's nothing wrong with owning nothing but index funds. The aforementioned 50% suggestion isn't etched in stone either and can be fluid. The only thing The Motley Fool feels strongly about in terms of a total number of holdings is owning at least 50 different stocks. How you do so is up to you.
Just keep index funds' upsides in mind when making your allocation plan. They're simple, inherently diversified, cost-effective, and require no regular monitoring.
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James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
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