Index Funds Plus a few Stocks Works for Me

Recently I received the following comment on my post titled Do You Have the Right Investments for Retirement?:

I believe that index funds serve as a good tool to use for some of a mutual fund portfolio, but I like to try to have some other funds who have consistently outperformed the overall averages as well. I know that index funds beat most mutual funds, but some funds do consistently outpace the major averages.

It's true, some funds do beat index funds, even after expenses are taken out. But how do you find these funds in advance (it's easy to find them looking back)? That's the problem, you can't.

So what should you do if you want the good performance of index funds with a bit of a "boost" to try and beat them? Here's what Money magazine suggests in addressing how many stocks you should own:

First, direct 90 percent of your U.S. equity allocation into a total stock market index fund that automatically gives you a stake in thousands of companies. That guarantees you a piece of every superstock that already exists or might emerge later - and, more important, it means you'll be adequately diversified and your investing costs will be at rock bottom.

Then pursue your search for the next Microsoft or Google by researching the daylights out of a very small number of companies and putting the remaining 10 percent of your portfolio into your one to three best ideas. This way you'll let yourself have a little fun. You will also minimize your risk and maximize your hope.

This is my current investing philosophy (I say current because I still own tons of managed mutual funds from my pre-index days that I'm trying to get out of, but managing my way through the capital gains bills.) But most of my new money is going into index funds with an occasional investment into a few hundred shares of one stock or another.

Comments

[Mrs. Micah]

Haven't had that itch yet, but I like the solution. Good post.