Investing strategies, from the basics up
An earlier post made the case for why to invest. This post is about how: choose a simple portfolio, use the right accounts, and build habits that make it easy to stay invested for decades.
There is no single allocation everyone needs to follow. The S&P 500 is the core of every strategy here, and holding it at 100% is a valid, simple long-term equity strategy. Adding international stocks or a value-momentum barbell changes what goes around that core, not whether you need one.
This post uses U.S. funds and accounts. It is general information, not personalized investment or tax advice. The four strategy allocations below refer to the stock portion of a portfolio, with emergency cash, any bonds, and optional crypto kept separate. Choosing a stock strategy does not decide how much of your total savings should be in stocks.
In this post: Mindset · Options · S&P 500 · Standard international diversification · U.S. barbell · International barbell · Crypto · Cash · Accounts · Spending · Behavior
The mindset: Think long term, keep it simple
Investing converts income into ownership of businesses. Buy broadly, keep costs low, and give compounding time to work.
- Think in decades, not quarters. Money needed within a few years generally belongs in safer assets.
- Pay down high-interest debt. Avoiding its interest cost can be more valuable than taking market risk.
- Raise the savings rate from both ends. Spend deliberately and develop skills that can increase earned income.
- Keep the portfolio understandable. Every extra fund adds monitoring, tax work, and temptation to tinker.
- Choose risk you can actually live with. A plan that requires selling after a large decline is too aggressive.
All four options below hold stocks. Any of them can suffer a deep, prolonged decline. International diversification and factor tilts do not turn an all-stock allocation into a safe place for next year’s expenses. A separate bond allocation can be appropriate if your time horizon or tolerance for losses calls for one.
Four valid strategies
| Strategy | Illustrative stock allocation | Main reason to choose it |
|---|---|---|
| S&P 500 only | 100% S&P 500 | Low cost and minimal maintenance |
| Standard international diversification | 70% S&P 500, 20% developed international, 10% emerging markets | Own businesses across more countries and currencies |
| U.S. value-momentum barbell | 50% S&P 500, 25% U.S. value, 25% U.S. momentum | Combine a broad core with two distinct stock-selection approaches |
| International value-momentum barbell | 50% S&P 500, 25% international value, 25% U.S. momentum | Combine developed-market value with U.S. momentum |
These are examples, not optimized weights or a ranking. Portfolio size does not require graduating from option 1 to any of the others. A larger portfolio can still be entirely S&P 500 within its stock allocation.
International diversification changes where you invest. Value and momentum change how stocks are selected. Those choices can be combined, but there is no need to add both unless each has a clear role.
Why keep the S&P 500 as the shared core?
The reason is practical as well as investment-related. 401(k) and HSA investment menus can be limited, and an S&P 500 index fund is often among the lowest-expense-ratio stock funds available. Using it as the core makes the strategy easier to carry across accounts without needing every account to offer every fund.
Use a low-cost S&P 500 option where it is available, then hold any international, value, or momentum additions in accounts with suitable choices. Compare the actual fund share class and any account or plan fees. An S&P 500 label alone does not guarantee the lowest total cost.
Option 1: S&P 500 only
The simplest choice is a low-cost S&P 500 fund across your investment accounts. It owns a broad collection of large U.S. businesses without requiring you to select individual winners.
Vanguard S&P 500 ETF (VOO) is one example. A low-cost S&P 500 mutual fund offered by a retirement plan can serve the same purpose. You do not need multiple funds tracking the same index in the same account.
The appeal is practical: low fees, broad exposure within U.S. large-cap stocks, straightforward contributions, and no stock-allocation rebalancing between funds. It is not just a temporary strategy for a small account. It can be the whole long-term equity plan.
The trade-off is concentration. The S&P 500 does not cover the whole U.S. market or the whole world. Its largest companies can dominate its returns, and U.S. stocks can lag other markets for years. Overseas revenue at U.S. companies does not fully replace owning foreign businesses.
Option 2: Standard international diversification
Keep the S&P 500 as the U.S. holding and add two building blocks:
| Role | Vanguard option | Schwab option |
|---|---|---|
| Developed markets outside the U.S. | Vanguard FTSE Developed Markets ETF (VEA) | Schwab International Equity ETF (SCHF) |
| Emerging markets | Vanguard FTSE Emerging Markets ETF (VWO) | Schwab Emerging Markets Equity ETF (SCHE) |
Choose VEA or SCHF, plus VWO or SCHE. VEA + VWO and SCHF + SCHE are straightforward pairs. Buying all four mostly duplicates exposure rather than adding a new source of diversification.
They are alternatives, not identical funds. VEA and VWO include small-cap stocks, while SCHF and SCHE focus on large- and mid-cap stocks. Check each fund’s benchmark and coverage rather than choosing on ticker alone.
The example allocation is 70% S&P 500, 20% developed markets, and 10% emerging markets. A different U.S./international split can also be reasonable. These weights are a deliberate choice, not a claim to match current global market weights.
The point is to reduce dependence on one country’s market, valuations, and currency. Emerging markets add a different set of businesses, along with political, governance, and currency risks that can be substantial.
International stocks can underperform U.S. stocks for a long time.
Option 3: U.S. value-momentum barbell
A barbell combines two distinct approaches. Here it means value on one side and momentum on the other, around the shared S&P 500 core. It is not the cash-and-risky-assets barbell sometimes described under the same name.
- Value favors stocks priced cheaply relative to business fundamentals.
- Growth favors companies with strong growth characteristics, such as earnings or sales growth.
- Momentum favors stocks with strong recent price performance, measured using a consistent rule.
Growth and momentum are not interchangeable. A growth company can have weak momentum if its share price is falling. A value stock can have strong momentum if its price has been rising.
Why momentum rather than growth?
The goal is to combine return patterns that behave differently.
Asness, Moskowitz, and Pedersen’s Value and Momentum Everywhere found negative correlations between value and momentum strategy returns across the markets they studied. That is the research case for combining them: their return patterns can offset one another rather than relying on the same conditions.
The distinction matters: Long-short factor research buys one group of assets and bets against another. Ordinary value and momentum ETFs still share stock-market risk and can fall together. These findings do not directly compare SPMO with a growth ETF.
A practical U.S. momentum fund
Invesco S&P 500 Momentum ETF (SPMO) is a good option to consider for the momentum side. It tracks the S&P 500 Momentum Index, selecting roughly 100 S&P 500 stocks using a momentum score based on price performance and volatility. The fund and index are reconstituted and rebalanced twice a year.
SPMO is not a permanent growth or technology allocation. Its holdings change as market leadership changes. It is also not a new universe of companies: alongside an S&P 500 fund, it increases the weight of selected stocks you already own.
For the value side, Avantis U.S. Small Cap Value ETF (AVUV) is one example. A broad value fund would make a different choice about company size.
An illustrative portfolio is 50% S&P 500, 25% AVUV, and 25% SPMO. The equal tilts are an easy-to-understand starting example, not evidence that the two funds contribute equal risk. This example is still U.S.-focused. Factor diversification does not replace international diversification.
The costs are real. Value can remain out of favor for years. Momentum can suffer when recent winners reverse sharply. The funds can have higher fees than a broad index, and momentum’s changing holdings can mean more turnover. ETF tax efficiency helps, but does not guarantee an absence of taxable distributions.
Choose this option only if you understand the tilts and can hold them through disappointing stretches. Do not buy SPMO just because it recently outperformed, or abandon value because it recently lagged.
Option 4: International value-momentum barbell
Keep the same 50/25/25 structure, but move the value side outside the U.S.: 50% S&P 500, 25% FNDF, and 25% SPMO.
Schwab Fundamental International Large Company Index ETF (FNDF) holds large companies in developed markets outside the U.S. Its index weights businesses using fundamental measures such as sales, cash flow, and dividends plus buybacks, rather than market capitalization alone. That approach tends to produce a value tilt, making FNDF an option for the international value side.
This combines two choices: a value-momentum pairing and some international diversification. FNDF supplies the developed-market value exposure, while SPMO keeps the momentum side in U.S. large-cap stocks. International describes the value side, not the whole portfolio. The example remains 75% U.S. stocks and 25% developed international stocks, with no dedicated emerging-market allocation.
FNDF is not simply an overseas version of AVUV. Switching between them changes company size and investment method as well as geography. It is also not a replacement for VEA/SCHF plus VWO/SCHE if the goal is broad developed- and emerging-market coverage.
This option keeps the barbell’s factor risks and adds currency and foreign-market risks on the value side.
Optional crypto: A small long-term allocation
A small crypto allocation can have a useful long-term role if you understand what you own and why you want decentralized assets. The reason should go beyond expecting higher prices. For example, you might value a network that allows ownership and transfers without a single controlling issuer. Not every crypto asset is meaningfully decentralized.
Target no more than 5% of the invested portfolio in crypto, excluding emergency cash. That limit covers all crypto holdings combined, not each coin separately. Understand the asset’s supply rules, how it is secured and held, and the possibility of large or permanent losses. Crypto is optional, not a replacement for the S&P 500 core.
If gains push crypto above 5%, stop adding and direct new contributions elsewhere. This follows the no-selling rule for taxable rebalancing, but allows temporary drift above the target. A hard ceiling at all times would require a different selling rule.
Keep a cash buffer outside the stock allocation
The same cash principle applies to every option: avoid having to sell stocks to pay essential bills during a downturn.
Use the trailing six months of essential spending to estimate a monthly run rate. Three months of expenses is a useful initial milestone. Build toward six months or more if income stability, dependents, or other obligations call for it. The target should follow spending needs and risk, not an arbitrary portfolio-value threshold.
A high-yield savings account, short-term Treasury bills, or a government money-market fund can serve different cash needs. Keep enough immediately accessible for bills. A money-market fund is an investment, not an FDIC-insured bank deposit, and Treasury bills have maturity dates to plan around.
Once the initial buffer is in place, you can invest while building toward the fuller target. Review that target quarterly as spending changes.
Cash reduces the risk of forced selling. It does not guarantee that stocks will recover before the buffer runs out, and it is not a complete retirement withdrawal plan.
Accounts are containers, not strategies
Decide the overall allocation first, then decide where to hold it. Measure the allocation across accounts rather than requiring each account to contain the same mix.
- Taxable brokerage: Flexible access, with taxes on dividends and realized gains.
- Traditional 401(k) or IRA: Potential deductions or pre-tax contributions, tax-deferred growth, and generally taxable withdrawals.
- Roth IRA or Roth 401(k): After-tax contributions with tax-free qualified withdrawals.
- HSA: Federal tax advantages for eligible contributions, investment growth, and qualified medical withdrawals.
The S&P 500 core can sit in any of these accounts. A 401(k) or HSA with a limited menu can hold the core, while an IRA or taxable brokerage holds the other funds in the chosen strategy. Let each account contribute to the overall target weights rather than forcing the full mix into every account. For the S&P 500-only option, the core is the entire stock allocation.
Choosing international stocks or a barbell does not require assigning an entire strategy to a Roth IRA. A Roth account does not need speculative holdings to be useful.
Prioritize useful account benefits
A reasonable starting order is:
- Contribute enough to receive the full employer 401(k) match.
- Maximize HSA contributions, if eligible.
- Maximize Roth IRA contributions, using a backdoor Roth IRA if income exceeds the direct contribution limit.
- Maximize the remaining 401(k) employee contribution space.
- Use taxable brokerage for additional investing and flexible access.
If the 401(k) plan supports additional non-Roth after-tax contributions and Roth conversions or rollovers, consider a mega-backdoor Roth between steps 4 and 5. This creates additional Roth space through the workplace plan. It is separate from the backdoor Roth IRA, not an interchangeable workaround for the IRA income limit.
This is not a universal tax ranking. The choice between pre-tax and Roth contributions depends partly on tax rates now versus later. Plan fees, eligibility, near-term needs, and withdrawal access also matter.
A backdoor Roth IRA may be an option when direct Roth contributions are income-limited. It involves a nondeductible traditional IRA contribution and a Roth conversion. Pre-tax balances in traditional, SEP, and SIMPLE IRAs can make part of the conversion taxable under the pro-rata rule. Check the IRS instructions for Form 8606 before treating the process as tax-free.
For an HSA, investing money intended for future medical expenses can be useful if current expenses can be paid separately. Keep records for qualified expenses incurred after the HSA was established. Expenses already reimbursed or deducted cannot also support a tax-free HSA reimbursement. See IRS Publication 969.
Prioritize Roth IRA space for tax-inefficient holdings
Ideally, put tax-inefficient investments in a Roth IRA. Emerging-market funds and value funds with high dividend yields are candidates for that space because recurring distributions can create a larger tax bill in a taxable account.
Keep tax-efficient broad index funds, such as the S&P 500 core, in taxable accounts where practical. Fit the holdings to the available account space while keeping the overall allocation on target.
Spending and income matter more than small allocation changes
Asset allocation cannot compensate for a weak savings rate. Track spending so the number is observed rather than guessed.
Use a manageable number of accounts and cards, pay credit-card balances in full, and set a monthly spending target. Review trailing six-month spending to smooth irregular expenses. If the target is repeatedly missed, inspect subscriptions, fixed costs, and lifestyle creep.
Put active effort into skills, career development, and earning power rather than constant portfolio changes. Turning higher income into regular contributions can matter more than a small difference between reasonable fund choices.
The hardest part is sticking with it
Automate contributions on a regular schedule. For S&P 500-only investing, there are no stock sleeves to rebalance. For the other options, review weights quarterly. Rebalancing does not require a trade every quarter.
Do not sell holdings in taxable accounts to rebalance. Use new contributions from income and cash dividends to buy underweight holdings instead. Turn off automatic dividend reinvestment where you want to direct those payments to a different fund. If incoming cash cannot restore target weights immediately, adjust gradually rather than selling taxable positions just to hit a percentage.
Rebalancing sales, when needed, can happen inside tax-advantaged accounts while keeping the combined portfolio allocation in view. Dividends in taxable accounts may still be taxable even when reinvested. This rule avoids realizing additional gains through rebalancing sales, not all taxes.
Write down the allocation, the cash target, and the reason for each fund. Review the plan when your circumstances change, not whenever a different strategy tops a recent performance chart.
- Do not switch between these options based on last year’s winner.
- Do not mistake adding overlapping funds for diversification.
- Do not sell solely because of headlines or a market decline.
- Check current fees, holdings, trading costs, and tax information before choosing a fund.
Simplicity is a valid destination. 100% S&P 500, standard international diversification, a U.S. value-momentum barbell, and an international value-momentum barbell are different choices with different trade-offs. Choose the one you understand and can maintain. More funds do not automatically make a better plan.