Is Money's only 7 Investments that you need wrong?

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ANNOUNCEMENT: To kick off the final stages of the 7 Millionaires … In Training! project selection process, AJC is going LIVE – this Thursday @ 8pm CST !!!

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Last month Money Magazine published an article listing the only 7 investments you need – and Kevin at No Debt Plan wrote a follow-up piece that summarized the options nicely:

That’s right, this Thursday @ 8pm CST 7million7years is coming to a web-cam near you! All you need to participate is a PC with sound and broadband connection – AJC has the web-cam!!

Click here for more details: http://7million7years.com/live … should be a ton of fun!

Now, for today’s post …

 

 

CNN Money thinks you only need 7 investments:

  1. A blue chip US-stock fund (track the S&P 500 index) (Fidelity Spartan 500 Index, FSMKX)
  2. A blue chip foreign-stock fund (track the international stock index) (Vanguard Total International Stock Index, VGTSX)
  3. A small company fund (T. Rowe Price New Horizons, PRNHX)
  4. A value fund (Vanguard Value Index, VIVAX)
  5. A high-quality bond fund (Vanguard Total Bond Market, VBMFX)
  6. An inflation-protected bond fund (Vanguard Inflation Protected Securities, VIPSX)
  7. A money-market fund (Fidelity Cash Reserves, FDRXX)

And, I was happy when I saw that Kevin’s article disagreed, saying:

I think that is four to six too many for the average investor … I think Money’s intentions were good here and I don’t have anything personal against the funds they mentioned. (Well, except the Fidelity S&P 500 fund. $10,000 minimum investment? Are you kidding?) I sincerely think seven funds is too much. You end up sharing a lot of the same stocks in many instances.

But, I disagreed for a totally different reason … Money is trying to have you invest in EVERYTHING … and, trying to invest in everything simply doesn’t work for all the reasons that Kevin of No Debt Plan mentions in his post (go read it!).

But, I disagree with Money on this one simply because I hate, hate, hate funds … any, but mostly the ones with fees e.g. Target Funds … which, No Debt Plan tells me can also be bought quite cheaply, if you shop wisely, so maybe I hate them not just for the fees 😉

I mainly hate them, because investing directly in a few select investments is a strategy of the rich and those who want to BECOME rich. Of course, diversifying a little may be a better way to stay rich … I’m still deciding on this one, and will let you know when I pop up for air.

So far, I’m still on the side of not diversifying …

Of course, not everybody wants to be rich (and, I recently found out that some of them still read this blog!), so for them I agree with Money strategy – but, drop the bonds and most of the other funds … just Funds #1 and #2 will do.

I’ve mentioned on this site before that Warren Buffett agrees 100%:

In fact, I was just at his Annual General Meeting in Omaha where he said that IF you don’t want to take the time to learn about investing directly then you should just dollar-cost-average into a broad piece of “American Business” … which he went on to clarify as meaning Fund # 1 (except he specifically named Vanguard for its very low costs, but I know that Fidelity fund is pretty cheap, too).

Here is what Kevin had to say (via e-mail) when he saw my comments on his post:

I believe in diversification for the average joe out there. I just think the 7 funds they picked was stupid especially because it takes more than $24,000 to get started with all of the minimum investments (if you wanted an equally weighted portfolio).

The target fund expense ratio is not bad at all 0.21% for the 2050 fund by Vanguard. Sure it isn’t 0.07% but it also isn’t 1%. For instant diversification starting out… I’ll take it.

I’ve read Buffet’s comments as well. Thinks the average investor should be indexing and I agree. Kind of a set it and forget it deal.

That’s where Kevin’s view and mine part company … we’re on the same page except that I think the ‘average joe’ should aim to get rich and not be indexing/diversifying at all … 

In fact, I was surprised to hear at his Annual General Meeting that Warren Buffett (and Charlie Munger, his partner also agreed) said that he would put 80% of his wealth into ONE investment – surprised because Warren owns 76 businesses and lots of other investments!
But, the reason he later said is that he grew bigger than his investments, so he had to keep buying more.
So, it’s very simple:
1. If you want to be poor, but slightly less poor than you otherwise might be: diversify into American Business a.k.a. buy one, two, or even all seven of Money’s recommendations (just choose the ones with the lowest fees) and wait 20 or 30 years. Actually, not all seven … if you can wait 2 decades, why buy bonds?
2. If you want to get rich, don’t diversify … choose a very few investment, choose them very wisely, and manage them very well! If you can do that you just may very well end up rich … 
Let me leave you with the words of a very wise man, business man, inventor, and famous author:

Behold, the fool saith, `Put not all thine eggs in the one basket’–which is but a manner of saying, `Scatter your money and your attention’; but the wise man saith, `Put all your eggs in the one basket and–watch that basket!‘

The Tragedy of Pudd’nhead Wilson, Chapter 15.
Mark Twain(Samuel Langhorne Clemens) [1835-1910].

PS Keep this post handy, you’ll need Mark Twain’s real name (including middle name for extra bonus points) to win at Trivial Pursuit … after all, you’ll have lots of spare time to play when you’re retired 7 years from now 😉
 
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13 thoughts on “Is Money's only 7 Investments that you need wrong?”

  1. There’s no problem at all in having the first four funds. Bonds have made nice returns from the early 80s till recently on the back of declining interest rates. But they’re unlikely to be very good going forward. However, they are negatively correlated with stocks and so a small investment in them (I have 10%) with rebalancing can make sense. I think they should have more funds rather than less…. more asset categories and levering the indexed stock funds to squeeze in some lower yielding investments with low correlations to stocks without reducing the rate of return. Of course I also believe in some active management…. you have to be very selective on managers. But all this is too complicated for most investors unless it was prepackaged – and the tendency apart from target date funds has been to cut up fund categories more and more. Here in Australia (where an index fund can cost 1% plus in expenses…) employer superannuation funds (equivalent of 401k) often have a “trustees’ choice” which is what a traditional defined benefit fund would have invested in. These usually are very diversified. You can also choose more or less aggressive combinations. For my wife’s super we chose 90% Trustees’ choice plus 10% “sustainable stocks” which is the one option not covered in the trustees’ choice and slants us a bit more towards stocks.

    But overall it makes sense to me to have a more passive investment portfolio and more active trading, investment, and or business activities and plough some of the profits back into the investment portfolio… I mean that is what a firm like Berkshire Hathaway is doing – earning money from insurance and some riskier trades and ploughing the profits back into long term investments often in rather boring businesses.

  2. @ Moom – Thanks, Moom. You are an educated investor. But, to me, it looks like you are ‘actively trading’ your passive portfolio: choosing fund managers (I’d rather be choosing undervalued stocks); rebalancing your portfolio, diversifying in out of bonds, etc, etc.

    These broad-based index funds, plus dollar-cost-averaging, plus time (20+ years) is all the ‘diversification’ that you need for you ‘passive’ stock portfolio.

  4. Thanks AJC. I’ve been pouring over your site all day and I can honestly say, yours is one of the most informative PF blogs. It is very surprising that it has come as far as it has, I remember visiting your site a few months ago and while interesting, wasn’t much content at the time. Keep it up!

  6. Diversifying is the way to go! Check out Steve Peasley’s podcast for the average investor. He offers great advice. He did for me!

    [link removed]

  7. @ Ruth – Diversifying is the way to go … for the average SAVER (that is, somebody who doesn’t have the inclination to invest) … but, for those who want to get rich, Warren Buffett (who also recommends Index Funds for the ‘Average Jody’) says that you should be prepared to bet the farm on a GREAT investment … his partner of many, many years (Charlie Munger) even went so far as to say he would put 85% of his investable assets into just ONE investment!

    I just happen to sit closer to Warren/Charlie on this than to the CNN Money Brigade.

  8. I have to agree with you here. Diversification is for people who are unable or unwilling to assume the risk inherent in seeking out better quality/performing investments than those represented by the market as a whole.

  10. Well, it makes no sense to avoid small stocks by just buying the S&P 500. And their value fund suggestion is also good. Both small stocks and value stocks have outperformed the large cap growth that the SPX is dominated by over time. And rebalancing makes sense. But yes, I am a speculator and that’s not for most people.

  11. @ Moom – “Value” and “Fund” is an oxymoron 😉 To find true ‘value’, you really need to be looking at a very select group of underlying securities … but, that’s only according to me and Warren Buffett.

    Speculating is a (Making Money 201) business – good luck with it (!) – it could be a great way to generate some income fast, IF your business (like all businesses) goes well.

    BTW: What are you doing for Making Money 101 (your safety net) and what are you planning for Making Money 301 (wealth preservation)?

  12. I guess it really depends on your goals and risk tolerance. Diversification sacrifices potential gains to protect against losses. If you buy index funds you aren’t going to get 100% annual returns… but you won’t get 100% losses either! Putting 85% into a single company is pretty risky even if your calculations indicate a company is a great value, companies can lie about their income and/or assets, new competitors can arrive, etc.
    I’m becoming more conservative as I get older- and thus I am buying more index funds. If I get 8% (average) returns on my retirement investments I will still be able to retire comfortably. I could potentially take bigger risks and possibly retire in grand style… or I may end up working until I die. That last option is pretty grim though… so I’d be willing to settle for three star hotels and coach for my travels.

    -Rick Francis

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