Building an investment portfolio is like preparing a balanced meal. A healthy plate needs a variety of food groups—proteins, carbohydrates, fats, and fiber—to meet your nutritional needs. You adjust food portions based on your ‘risk’ such as dietary restrictions and goals like losing weight or gaining muscle.

An investment portfolio is similar in that it requires a mix of asset classes—stocks, bonds, alternatives—to achieve your financial goals. Over time, you may need to tweak the balance to meet your changing needs or risk tolerance. It’s all about optimal growth and stability!

Unfortunately, investing isn’t quite as simple as going to the grocery store for the right ingredients. Building an investment portfolio that’s simple, manageable, and designed to help you grow your wealth over time can feel like a near-impossible task. But we’re here to make the process easier!

In this blog, we’ll explore the importance of investing and the 7 steps you can take to build a basic, higher-performance investment portfolio.

Why Should You Start Investing?

Investing is a powerful tool to grow your wealth and achieve long-term financial goals. 

Do you want to retire one day? Purchase a home or a car? Go on a European adventure? Start a family? If you resonate with any of these, you’re going to want to start getting serious about investing.

But for beginners, the world of investing can seem daunting. How do you know where to start? What should you invest in? Let’s find out.

Step 1: Define Your Financial Goals

Before diving into investments, it’s essential to understand why you’re investing. Are you looking to save for a house, plan for retirement, or build an emergency fund? Different goals come with different timelines and risk tolerances. For example, if you’re saving for something in the next 2-5 years, you may want to stick with safer, lower-risk investments. For long-term goals like retirement, you can afford to take more risks since you have more time to ride out market fluctuations.

Once you’ve clarified your financial goals, you can determine how much money you’re willing to invest and what kind of risk you’re comfortable with.

Step 2: Understand Risk and Diversification

All investments carry some level of risk—you can’t get away from it. Stocks may offer higher returns, but they’re more volatile compared to bonds, which tend to be more stable but offer lower returns. Understanding your risk tolerance will help you choose the right mix of assets for your portfolio.

One of the most important lessons in investing is diversification.

A well-diversified portfolio includes a variety of investments, which helps manage risk. If one investment underperforms, others may perform well, balancing out your overall returns. Diversification is a key principle for reducing risk without sacrificing potential growth.

Step 3: Choose the Right Asset Classes

A basic investment portfolio typically consists of 4 main types of assets:

1. Stocks (Equities): Owning stock means you have a share in a company’s profits. Historically, stocks have provided the highest returns over the long term, but they also come with higher risk. Stocks can be ideal for long-term growth.
2. Bonds (Fixed Income): Bonds are loans you give to governments or corporations in exchange for regular interest payments. They are generally less volatile than stocks and provide more stability to a portfolio.
3. Cash and Cash Equivalents: This includes savings accounts, money market funds, and other liquid investments. While they provide modest growth potential, they are the safest and most accessible.
4. Alternatives: An alternative investment is a financial asset that doesn’t fall into one of the conventional investment categories like stocks, bonds, or cash. This includes real estate, hedge funds, natural resources, private lending, and tangible assets.

To create a balanced portfolio, consider a mix of stocks, bonds, cash, and alternatives based on your risk tolerance and investment timeline. A common strategy for beginners or those with lower risk tolerance is the 60/40 portfolio: 60% in stocks for growth, and 40% in bonds for stability. However, the allocation can be adjusted based on your goals and risk tolerance. A financial advisor can help you appropriately diversify your portfolio.

Step 4: Start Simple with Index Funds or ETFs

If choosing individual stocks or bonds seems overwhelming, you’re not alone. Many beginners start by investing in index funds or exchange-traded funds (ETFs). These funds pool money from many investors to buy a diversified mix of stocks, bonds, or other assets.

• Index funds: These funds track a specific market index, such as the S&P 500. They offer broad market exposure and tend to have low fees.
• ETFs: Similar to index funds, ETFs can track indexes or sectors, but they are bought and sold on the stock exchange. They provide an easy way to diversify and are often a cost-effective option.

By investing in a broad market index fund or ETF, you can gain exposure to a wide range of companies and industries with a single investment, reducing risk while still benefiting from market growth.

If you’re waiting to meet with your financial advisor but still want to get started ASAP, you can do so with a high-yield savings account. A high-yield savings account pays 20-25x higher than the average standard savings or checking account. However, there can be service fees and minimal balance requirements, so be sure to read the fine print.

Step 5: Regularly Contribute and Rebalance Your Portfolio

One of the best strategies for growing your investment portfolio over time is dollar-cost averaging. This means investing a fixed amount of money regularly—say, monthly—regardless of market conditions. This strategy takes the emotion out of investing and allows you to buy more shares when prices are low and fewer when they are high.

As your investments grow, some assets may outperform others, throwing off your original allocation. For example, if stocks perform well, they could make up a larger portion of your portfolio than you intended, which could increase your risk. To fix this, you’ll need to rebalance by selling some assets and buying others to maintain your desired mix.

Step 6: Keep Fees Low

Investment fees can eat into your returns over time, so it’s important to be aware of them. Look for low-cost index funds or ETFs that have minimal expense ratios. Avoid trading frequently, as transaction fees can add up, and steer clear of investment products that charge high management fees.

Step 7: Stay the Course and Think Long Term

If you take away anything from this blog, it should be this: investing is not about getting rich quick. And if an investment promises to do that, it may be smart to turn the other direction. 

Investing is a long-term game. The stock market will go up and down, but over the long term, it has historically provided positive returns. The key to success is to stay invested and avoid the temptation to time the market based on short-term fluctuations. If you panic and sell during market downturns, you could miss out on the recovery.

Stick to your investment plan, regularly review your goals, and adjust your portfolio as needed. Over time, the power of compound interest will work in your favor, allowing your investments to grow.

Take the First Step Toward Building Wealth

Building an investment portfolio may seem intimidating, but by starting small, sticking to basic principles, and remaining consistent, you’ll be on your way to achieving your financial goals. Remember, it’s not about timing the market—it’s about time in the market. With a well-diversified portfolio, regular contributions, and a long-term mindset, even beginners can become successful investors.

Disclaimer:

This material is intended for informational purposes only and should not be construed as legal or tax advice. Information here is not intended to replace the advice of your investment advisor or financial advisor. This information is not an offer or a solicitation to buy or sell securities. This information may have been compiled from third-party sources and is believed to be reliable. All investing involves risk, including the loss of principal.