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💰 Setting Up My Portfolio
Preston Victory
June 19, 2024
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Welcome, Future Early Retirees.
You are all excited by the prospect of financial freedom and are excited to invest. There’s just one problem, you don’t know how. Good news is I got you. Structuring a portfolio is probably the most important piece of making your investment setup align with your personal financial goals.
In today’s newsletter:
What is a Portfolio?
Overview: Your portfolio is the group of assets/investments you own. There are variety of different assets you can own such as stocks, bonds or real estate. Generally speaking you want diversify your assets so you don’t risk losing your hard earned money.
The details: A portfolio in the context of investing refers to a group of assets owned by an investor. These assets can include a variety of financial investments such as stocks, bonds, mutual funds, exchange-traded funds (ETFs), real-estate properties, and other securities. The goal of an investment portfolio is to achieve a desired level return on the money you put in.
The concept of a portfolio is fundamental to modern investing. It allows investors to manage risk and maximize returns by spreading their investments across different types of assets. This diversification helps to reduce the impact of poor performance in any one asset on the overall portfolio.
For example, lets say you had 10 stocks you really liked. Instead of just picking one them to put your money into, you divide you money up into 10 and put an equal amount in each stock. If one underperforms, the loss will likely be offset by the increase in value of other stocks or asset classes.
How do you set one up?
Overview: There is more than one way to build your portfolio. Really there is an infinite number of ways to put it together but they generally fall into one these categories: diversified investing, index investing, growth investing and all in one investing.
The details: There are many different ways to build your investment portfolio. Each strategy is unique and has upside as well as downside. Picking one that you understand and sticking to it is what allows you to achieve your financial goals. Here are the most common strategies:
Diversified Portfolio: A diversified portfolio includes a mix of all different asset classes, such as stocks, bonds, and cash. This strategy can help reduce risk by spreading your investments across different types of assets.
Risk/Return: Low
Index Investing: This strategy involves investing in index funds or ETFs that track a specific market index, such as the S&P 500. This can provide broad market exposure and is considered a more passive investment approach. I would recommend this to anyone who wants to keep their investing strategy simple but be very effective at building long-term wealth.
Risk/Return: Medium
Growth Investing: Growth investing focuses on investing in companies that are expected to grow at an above-average rate. This strategy can be riskier, as the future growth of these companies is not guaranteed. A lot of the investment is based on who is running the company and your belief they are going to be able to execute the plan they laid out.
Risk/Return: High
All-in on One Stock: This is the highest-risk strategy where all of your investment capital is allocated to one stock. While this approach can potentially yield high returns, it also carries a high level of risk, as the stock can be volatile and fail. I wouldn’t recommend this to anyone. Even if you are personally involved in the day to to day operations of the investment, it is good to at least have a portion of you money invested in more than one company.
Risk/Return: Highest
What does my portfolio look like?
Overview: I am more of a growth investor as I am young and have a lot more time to take risks. About 75% of my portfolio is index funds or ETFs while the rest is in individual stocks that I believe have potential to grow big.
The details: I would put myself in the growth investing camp as I take a lot of risks and am comfortable with the fact not all of those risks will pay off.
About 25% of my total portfolio is in individual stocks/companies. These are companies that I think have great potential and the value of them will be 10 times what they are today, meaning for every $10 I invest I get $100 back. While this is an exciting prospect, there is a very good chance I am wrong and either they don’t perform how I expect them to or they fail miserably and go out of business where I lose all my money I invested. If this makes your stomach turn, it may be best to invest in to index funds.
Speaking of index funds, that is where the rest of my money is invested. These are well diversified funds that help mitigate the risk I take on when investing in individual stocks while also generating a healthy return. Some are very popular such as the S&P 500 ($VOO or $FXAIX), Nasdaq-100 Index ($QQQ) and Dow Jones U.S. Dividend 100™ Index ($SCHD). These have almost no chance of losing you money in the long run and have historically produced very healthy returns that have allowed many individuals to retire early.
Which way is best for you?
Overview: It is ultimately up to you to decide what kind of portfolio you want to build. It is important to self assess what you are comfortable losing with there being a chance you are rewarded for your risk taking approach.
The details: Deciding on the best investment strategy involves a thoughtful assessment of your personal financial goals, risk tolerance, and investment horizon. Here's how I like to think about it:
Define Your Goals: Are you trying to accelerate your path to financial freedom, saving for retirement, a down payment on a house, or a child's education? Whatever it is, each goal will have a different time horizon and risk tolerance associated with it. I find that writing the goals down helps me stay motivated.
Assess Your Risk Tolerance: How will you handle fluctuations in the value of your investments. Some days the value goes up and others it goes down. If you're comfortable with the possibility of losing some or all of your investment in exchange for potentially higher returns, you likely have a higher risk tolerance. If you prefer more stable returns, even if they're lower, you likely have a lower risk tolerance.
Determine Your Investment Horizon: How long do you expect to hold your investments. If you're investing for a short-term goal, like a vacation or a new car, you may want to choose a more conservative investment strategy. For long-term goals like retirement, you may be able to take on more risk.
Research Investment Strategies: Now it is time for you to make a decision. I’d start with looking at the strategies we discussed above.
Regardless of what you ultimately decide, being informed about your strategy and investment decisions is what is going to give you the best chance at achieving your financial goals.
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