I have been doing some reading on investment planning. Some great books that everyone should read are "A Random Walk Down Wall Street" by Burton Malkiel and "The Intelligent Asset Allocator" by William Bernstein. Both of them advocate passive investing. Markets are efficient, you cannot beat the market, you most certainly cannot beat the market by being an arm-chair analyst. The most you can hope for is to not lose to the market. Read the first book if you do not believe me. A Random Walk also gives an excellent introduction to various investment vehicles and terminologies. If you do not know about mutual funds, expense ratios, capital gains, turnover rate, rebalancing, PE ratios, alpha, beta, read the first book.
So what is the intelligent investor to do? Decide on how much risk you can take, depends on what you are saving for and your personal appetite when you lose half your portfolio. The most important thing in investing is to stick to your strategy though bear markets, so it is essential that you design your portfolio keeping this in mind. Risk decides bonds to stock ratio in your portfolio, higher the stocks fraction, more the risk and higher the expected rewards. Now further divide each part into various sub components. For example, short term bonds and intermediate term bonds for bond part, and foreign stocks, large cap stocks, small cap stocks, REITs for stocks part. Assign percentage numbers to each of these and buy a index fund that tracks the corresponding asset class. You now have a portfolio! Every time you invest more money, invest in all of them in the proportion you decide. This part is important, you want to keep putting money in even when the prices are falling and you are losing money. Everything reverts to mean, buy low and sell high. The Intelligent Asset Allocator gives excellent advise on how to design a portfolio and analyze its expected return and risk.
Every year, rebalance. Sell off assets that now make a higher proportion of your portfolio and buy those that now make a smaller proportion than the target. This is by far the most important part. More important than the exact composition is disciplined regular rebalancing. Rebalancing essentially means selling your winners and buying your losers. Remember, assets revert to mean. Buy low sell high.
I designed a spreadsheet to track a portfolio, calculate how much off target it is, etc. Its is a very simple sheet, you can check it out here. You only need to fill out the grey cells, rest are all automatically calculated. It is pretty basic, I might add new features from time to time. If you find it useful, let me know. If you add some stuff to it, let me know. (Need less to say the numbers in the sheet are made up, the allocations should not be taken as suggested allocations).
Disclaimer: I am not a financial planner. You can bankrupt yourself by following this advise. All software is provided as it. You can bankrupt yourself by using the linked spread sheet.