How To Build An Investment Portfolio | Invest

Investing can be difficult for everyone, but for those between the ages of 20 and 30, it can be particularly intimidating to build a portfolio from scratch, especially while paying off student loans, credit card debt, and more. by making savings. Add to that the massive sales inspired by the 2020 pandemic and the 2008 financial crisis, and investors have a number of disturbing memories that may deter them from getting their finances in order.


But learning how to build a portfolio is something that can end up creating huge rewards down the line.

“People should start saving and investing as early as possible,” says Adam Green, CEO of YieldX. “The growth of savings and the power of funding give a huge head start to those who can put money aside and invest early in their lives and careers.

One thing to consider before embarking on the next steps is whether you have readily available savings for rainy days – like three to six months of living expenses hidden in a bank savings account in case you are. dismissed.

“It is strongly recommended that you have adequate emergency savings before you start investing,” says Eric Thompson, director of Round Table Wealth Management.

However, Robert Johnson, professor of finance at Creighton University, argues that building wealth and achieving financial independence is not a linear process that must begin with established savings.

“You have to juggle multiple goals simultaneously – fund a retirement plan, build emergency savings, save for a child’s college, pay off student debt, and so on. He said.

Here are four essential steps to take when starting to build an investment portfolio:

  1. Determine your target asset allocation.
  2. Start investing in an employer savings plan.
  3. Open an IRA or standard brokerage account.
  4. For more help, consider a robo advisor.

Step 1: Determine your target asset allocation

If you stick around long enough with the guys on Wall Street, you might end up hearing about the 60-40 portfolio. It’s often called a typical stock and bond balance, with 60% stocks and 40% bonds. There is also a formula that says 100 minus your age should be your percentage of exposure to stocks.

But both of these can be simplistic, and setting your target allocation – a mix of stocks, bonds, and other investments – can take a bit more work.

Return expectations, risk tolerance, time horizon, tax status, career path, lifestyle, and cash flow requirements are all important factors to consider when trying to determine your target asset allocation.

The younger you are, the more risk you can take because your portfolio will have more time to recover than that of someone nearing retirement. People with high job security and high incomes can also afford to take more risks.

Yet even if you are young and have a solid job, you might find it difficult to accept volatility, especially on the downside. In this case, you might want to have less exposure to stocks, or at least have more defensive stocks in your portfolio.

“An investor’s ability to take risks and his willingness to take risks may not be the same, so marrying the two can take time and education,” says Ryan Johnson, director of portfolio management and research at Buckingham Advisors.

Beyond the simple diversification of owning stocks and bonds, new investors may also consider other types of diversification, such as the mix of national and international stocks and bonds, corporate debt through versus government debt, large and small cap companies and a mix of aggressive and defensive sectors.

Fortunately, exchange-traded funds, or ETFs, and mutual funds can make this type of diversification a lot easier than it would be if you had to pick individual stocks. And funds like these offer diversification within a specific niche simply by holding multiple holdings.

Diversification beyond stocks and bonds is also a possibility. “Money is king” is a saying for a reason, and during times of market downturn, investors often shy away from the relative safety of the US dollar or Japanese yen.

Alternative assets such as real estate, commodities, precious metals and cryptocurrencies can also behave differently from traditional stocks and bonds and serve to improve portfolio diversification, says Liz Young, head of strategy at investment at SoFi Technologies (ticker: SOFI).

Step 2: Start investing in an employer-sponsored savings plan

Employer-sponsored savings plans, such as the 401 (k), can be a great and simple place to start gaining exposure to the stock and bond market.

A common advantage is for employers to match an employee’s contribution up to a certain percentage. It’s a good idea to contribute to at least one of these plans up to your employer. It’s almost like free money.

“People should do whatever it takes to participate in their company’s 401 (k) plan at the level required to get the full employer match,” Johnson said. “And yes, even if that means slower repayment of student loan debt or other debt or delaying the purchase of a home or the purchase of a smaller home.”

When investing in a 401 (k), new investors can refer to their target asset allocation, or they can make it easier by using target date funds or asset allocation funds.

Target date funds are mutual funds that adjust their allocation over time to become more conservative as the investor nears retirement. Asset allocation funds are like target date funds that never change, so you will need to change them as your timeline or goals change.

Step 3: Open an IRA or Standard Brokerage Account

If you’ve maximized your 401 (k) but still have more money to invest, a brokerage account, whether tax-deferred like an individual retirement account or after-tax like a standard brokerage account, offers more investment options than a typical 401 (k) account.

The different tax treatments of each type of account are what can ultimately sell an investor, given that the money is subject to tax at some point.

“If you’ve earned an income and you’re starting out small, opening a Roth IRA might be a better choice in the long run than a traditional taxable brokerage account,” said Johnson of Buckingham. “Either way, the money comes in after tax, but with a Roth IRA it grows tax-sheltered and comes out tax-sheltered in retirement.”

With a taxable brokerage account, the tax consequences at the end of the year become a consideration in your investment decisions, Young says.

“Receiving a dividend, receiving a coupon on a bond, selling a security for a gain or a loss, and many other actions have tax consequences that must be taken into account when considering a stake and calculating it. of performance, ”said Thompson.

Step 4: For more help, consider a Robo advisor

If all of this still seems overwhelming to you, or if you’d rather do something else, there is an easier way to build a portfolio: with robo advisors.

These platforms use algorithms and modern portfolio theory to create portfolios based on an investor’s goals. All you have to do is create an account, take a short quiz, and the robot will recommend a portfolio for you. Many also help you stay on track with automatic rebalancing.

Robo Advisors bridge the gap between full do-it-yourself investing and full-service financial advisors, Young says. “There are a lot of investors who fall into this gap,” she says.

Robo advisers can be especially helpful for new investors who need help taking the emotion out of investing, she says.

The biggest downside to robotics advisers is that they are largely a one-off option, Johnson says.

“The biggest advantage of using a human advisor is that when the market is volatile, the advisor can reassure the client that they are on the right track,” he says. “My belief is that the greatest contribution of an advisor is to explain why a certain strategy is correct and to deter the individual in times of market turbulence.”

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