From Here to Financial Happiness

Day Sixty Four Matching the Market

You're now ready to pick investments. Over the past week, we've talked about your asset allocation – your basic mix of stocks and more conservative investments. We've looked at the importance of diversifying broadly and holding down investment costs, including taxes. We've discussed how unlikely it is that you'll beat the market.

What does all this mean for the investments you buy? Even folks who agree on the fundamentals of investing end up with all kinds of different portfolios. But let me suggest two super‐simple strategies. We'll discuss one today and one tomorrow.

Today's suggestion: Build a portfolio using three core index funds. Index funds buy many or all of the securities that make up a market index, in an effort to match the index's performance. The funds almost always fall slightly short of this goal, because of their investment expenses. Still, those expenses are typically low, so the shortfall is modest – and far less than that suffered by most active investors, with their much higher investment costs. Result: By aiming for average, index funds fare far better than most other strategies.

Index funds come in two varieties: mutual funds and exchange‐traded funds (ETFs). Mutual funds are bought directly from the fund companies involved, with their share price established as of the 4 p.m. ET market close. Exchange‐traded funds are listed on the stock market and are available for purchase throughout the trading day. To buy shares, ...