I want to share with you the 5/15/500 rule I created for myself with regard to my stock portfolio.
The 5 years rule
The “5” in the 5/15/500 rule is a reminder to only use money you do not need for the next 5 years. As I already mentioned in the portfolio timeline guide, we must invest money that we need to use money within the next 5 years. So if we need that amount of money for our house mortgage or to pay for our children’s education next year, keep it in cash! The stock market fluctuates and we need invest with the assumption that the money will only be back 5 years later. When we are able to adopt a longer-term horizon, we will be able to make better decisions.
The 15 stocks rule
The “15” in the 5/15/500 rule is to build up a stock portfolio consisting of at least 15 stocks. But remember not to blindly diversify. Each of these 15 stocks must be business you have confidence in. But we know that there isn’t any guaranteed investment, which is why we place our money into 15 portions. They need not be equal portions and we can place more of our money into stocks which we have higher confidence.
The 500 Index ETF Rule
The “500” in the 5/15/500 rule is to more of a suggestion instead of a rule. This is to get you to consider putting a portion of your money in Index Exchange Traded Funds (ETFs). Let me explain a little more.
In the stock market, there is an index that represents the market as a whole. So everyday, when you hear things like the stock market is up or the stock market is down, what it really means is that the index is up or down that day. This stock market index is a group of stocks put together to represent the market. So in Singapore stock market, we have the Straits Times Index (STI), which consists of 30 stocks that the Singapore Stock Exchange deems as the best representation of the overall Singapore stock market. You will see businesses that are relatively strong in the Index. In the US, there is the Dow Jones Industrial Average, which also consist of 30 representative stocks, thus it is known as the Dow Jones 30. There is also the Standard & Poor’s 500 Index (S&P 500), which consist of 500 relatively good performing stocks from different business sectors. The “500” in the 5/15/500 rule is referencing the S&P 500 as an index we can look at purchasing but the key idea is to consider index ETFs, which could also include the Dow Jones 30 and STI.
When we buy an Index ETF, we are buying a fund that is created to be similar to that Index. To put things in a simple way, if we buy the STI ETF, it is as if we are buying the 30 stocks in the STI ETF. And if we buy the S&P 500 ETF (ticker symbol SPY), we are purchasing 500 of the best performing businesses in the US stock market to work for us.
You should consider an Index ETF if you do not have the time to build up your own stock portfolio of 15 stocks. And the advantage of purchasing an Index ETF is
Well diversified.
Because you are buying a fund with 30 stocks or 500 stocks, you are pretty well diversified.
Beats Average Mutual Funds.
Most fund managers aim to beat the index but do not manage to do so consistently. When you buy the Index ETF, you have a high chance of getting better than most mutual funds out there. Plus, the fees for holding onto a Index ETF is typically lesser than most funds’ management fee. The fee is typically less than 1% per year.
So remember the 5/15/500 rule when you are constructing your own stock portfolio.
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Mind Kinesis Research Team