Hi Allen, Re: Stocks and ETFs; designing your Investment Pyramid......
Something we discussed years ago here on the AIM forum was the concept of an investment pyramid. If you think of a 4 sided pyramid being divided into thirds by height, each section can be represented by different components.
The base needs a solid foundation with strong investments that don't shift much with earthquakes or other traumas. That third of the height represents for most people a far greater volume that either of the other two sections. So most people build that strong base out of solid dividend payers with low volatility.
The second 1/3 of the pyramid's height is smaller in volume so less total value would be invested there. Here we can stand a bit more volatility but nothing reckless - ETFs would fit well here. They can cover a lot of investing interests with a single purchase. They are responsive to both economic and business cycle events so offer potential for capturing some profitable trades while being limited in "single stock risk."
The very top 1/3 of the pyramid represents the smallest total volume of material and can be far spicier than any of the other layers. Here you can consider some individual company stocks or other higher volatility components.
Over time some of the top level items might grow to be worthy of being shifted to a lower part of the portfolio. That will depend upon how they mature. You also can change out components in any of the three pyramid sections. They should be changed for components that would be of the same general type.
A good friend uses the "sandbox" analogy instead of trying to describe such a pyramid. He says all investors who can afford it should build a solid portfolio but keep a small portion of investment dollars available for "playing in the sandbox." He usually suggested 5% to 10% of the total portfolio as the sandbox target value. Here people can play with new ideas, 'tips' from friends, Cramer ideas, etc.
Stocks or ETFs or traditional mutual funds or other types of investments aren't all 'right' or 'wrong' but are tools to accomplish one's ends. How we blend them needs to be thought out well as part of the overall investment business plan. Sector ETFs might give us nice long term upside growth with lower downside risk than common stocks from the same sector. Diversified mutual funds will have far lower daily volatility but might give us excellent stability and possibly income. For stability and longevity, keeping the heaviest investments out of the upper stories of your investment pyramid should help.
