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50/25/25 Rule: Investing 101

Updated: Apr 1

I get asked all the time, "Where do I begin investing?" If you are a novice investor or just looking for some easy market ideas, follow along to learn one quick rule to start investing!

There are three main brokerage houses I’d recommend for retail investors:

  1. Fidelity

  2. Schwab

  3. TD Ameritrade

Because TD Ameritrade and Schwab are merging, these will eventually only be one shop. But for now, the websites are still operating separately as the integration takes place.


What’s great about all these investment platforms is the ability to purchase partial shares. So even if you start out with a small deposit, you are able to put your money to work.


I could go down a rabbit hole of mutual funds vs. ETFs, sector allocations, emerging markets, individual stock selection, etc. but for a brand-new investor this can be quite confusing!


So, how should a first-time investor start? I would recommend investing, even a little, each month. Start early and try not to focus on the growth or loss. If Fed speak and the economic numbers are to be trusted (which is a BIG IF), we could see the bears continue to win 2023 and more pain in the next 6-12 months. But fear not! You can (and should) still be investing!


50/25/25 Rule


If you are just starting out, I recommend the 50/25/25 rule utilizing ETFs.*


50% Large-cap S&P 500 ETF

25% Mid-cap Index ETF

25% Small cap Index ETF


This method provides diversification while giving you general market exposure. Instead of relying on specific stock selection or bets on different sector allocations, this strategy gets you started in broad-based funds, being more heavily weighted to the large cap (sometimes called blue chip) companies. I recommend also adding exposure to smaller and medium sized corporations as they may have a greater chance for larger growth, faster. That obviously means they are also more volatile and can potentially be riskier, which is why they are 25% each instead of splitting the structure evenly between all three ETFs. Generally speaking, this diversification helps offset one indices’ weakness at any one time.


As a novice investor (which I’m assuming many of you are), our risk tolerance can be greater since we have a longer time horizon to invest. The down months just mean beginner investors are buying new shares at a lower price!


Which ETFs do I buy?


I am partial to the Vanguard ETFs because of their low fee structure, but there are many different ETFs available to track these different market cap indices.


VOO – Vanguard’s Large-cap S&P 500 ETF; as the name suggests it tracks the S&P 500 Index, which is made up of large-cap stocks such as Apple, Amazon, Google, Microsoft, Johnson & Johnson and Exxon.


VO – Vanguard’s Mid-cap Index ETF; mid-cap stocks have a market value of $2-$10B and are, as the name implies, in the middle range of company size/revenue. This ETF may have stocks you are less familiar with, such as Centene, Motorola, Arthur J. Gallagher, IQVIA and American Water Works.


VB – Vanguards, Small cap Index ETF tracks the CRSP U.S. Small Cap Index which holds companies of <$2B market capitalization. This ETF has companies such as Steel Dynamics, Booz Allen Hamilton, First Horizon, Aramark and Deckers Outdoor Corp.


Investment Example


Each month Allyson deposits $200 into her brokerage account. She then purchases:


$100 of VOO

$50 of VO

$50 of VB


Each month she is adding to her current portfolio, which is a term called dollar-cost averaging. Whether the market is up or down, she continues to add to her positions. This a great way for novice investors to slowly work into the stock market and build a comprehensive portfolio.


Note: The purchases listed in the above example would be partial shares of each security as VOO, VO and VB are all trading above those purchase amounts.


Additional Options


If you are starting with a small amount (great job for starting!), I may recommend only starting with the S&P 500 to get your feet wet. As your money grows or you are able to invest more funds, you can diversify into the 50/25/25 rule.


If you have a substantial nest egg already, you may want to try your hand at individual stock selections, sector allocations, emerging markets or global funds. These can be added in slowly, but I would recommend keeping your overall investment portfolio at 70-80% of the 50/25/25 rule.


There are a lot of different facets to investing, but hopefully this crash course helps beginner investors get started! Please comment with any additional questions so I can direct future post content.

 

*Note: An ETF is an exchange-traded fund. This means that, like a mutual fund, it is a basket of individual securities, usually tracking an index. ETFs trade on the stock exchange and unlike a mutual fund can be bought and sold during the day at market prices.


This is not an advertisement or solicitation for business, and my personal experience does not constitute universal application. Information is for informational and recreational purposes only. Each financial situation is unique, and you should do your own due diligence. Past performance does not guarantee future results. Some content may contain affiliate or referral links.



Jordan is the creator of Lifetime Tidbits and has spent more than 10 years working in finance, primarily as a securities trader. She holds her CFA charter and has been Series 7 & 63 licensed.

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