Chances are you are already well past the Investments 101 phase and are working with your broker of choice whether it is Fidelity, Vanguard, Charles Schwab or the plethora or other brokerage companies, and you have your specific accounts including a company 401K, an IRA, and a taxable brokerage account. You may even have a 529 plan set up for your child or children. If this does not pertain to you, those are the basics that you will need to secure as the groundwork for your portfolio. Nonetheless, if you are past this part or are wondering what to have as actual investments within these accounts, this information will help guide you.
Unfortunately there is not a clear, one size fits all answer.
I am not going to give you a list of the top investments for your portfolio. Why? Because it is just that, YOUR portfolio.
And as such, it needs to be specific to you. What I can help you with is the process of deciding what is best for your individual needs, thus enabling you to choose the investments that will fit your financial goals and your personal needs.
Finances are personal.
We all have different personalities and different levels of comfort. That helps dictate what types of investments are best for each individual. Some of us are risk-seekers, some are risk-neutral investors, and others are risk-averse investors.
So first, you must discern the type of person you are, especially regarding investments, in order to answer the question about which investments are best for you. Let’s think through some scenarios. These are easy questions that will give you some insight into your basic personality type. In all likelihood, you already know what that is. But for each scenario, think how you would likely respond.
- A stranger in a public setting rudely confronts you. How would you respond to the stranger and the situation?
- In a meeting with a hundred or so people, your boss calls out your name and tells you to stand up. What is your response?
- When you are driving, if someone flips you off, what is your reaction?
Assess yourself. How aggressive, neutral, or passive are you in these situations? Now, let’s think through some financial scenarios.
- You invested $100,000.00, and you checked your account to discover that it was now $70,000.00. On top of that, the news media is reporting that a recession is looming. How would you react?
- Do you typically save money or spend it? This one is pretty insightful.
- How do you feel about money in general? Do you worry about it or feel confident regarding money and decisions?
Let’s go back to the three types of personalities – especially financial personalities. Would you consider yourself to be aggressive, neutral, or passive?
Next, for step #2, let’s think about each financial goal separately. You need to list out each financial goal then think about the purpose of each. This will also provide you with some insight into the timeframe for each account. For instance, a 529 plan for your child that you will access when your child turns 18, is going to look so different from your 401K plan that you will not touch until retirement. Taking into account when you will need to access each account will give you insight into how aggressive you can be with your investments within the account. If you have trouble figuring out some of this, one quick rule for retirement accounts is to subtract your age from 120 and that should be the amount of stock allocation in your portfolio and the difference should be in bonds, real estate, and/or commodities. Of course, you can also contact me and we can walk through this process together to help you understand your needs better.
After you have worked through listing all of the goals and the timelines, your third step in setting up what should be in your portfolio is to take an investor allocation quiz. There are several trusted sources you can find but I have listed two good ones – one is from Vanguard and the other is from Charles Schwab. Take the quiz for each individual investment because you have a separate goal for each account as noted in step #2. In addition, your risk profile, which is the aggressive, neutral, or passive component, may change for each account due to the horizon and your reliance on that individual account. This will help you to better adjust your allocation for each account in your portfolio. Here are the links to the investor allocation quizzes:
After taking the quizzes, you will want to make the necessary changes to your accounts and be sure to monitor each account on an ongoing basis. Being diligent with this step is what some people find difficult and why some would rather defer to a financial advisor. I don’t think it is necessary to enlist the services of a financial advisor and feel most people can handle this process themselves, especially if you are actively are educating yourself on these topics, but you could make a case for getting help if you know you will be negligent with this step.
Moreover, you need to evaluate your portfolio carefully every year. From year-to-year your goals and needs will change and that will greatly affect your financial landscape and, thus, your allocations. Be careful, however, to allow for market shifts. Don’t adjust at every downturn or whenever there is volatility because there WILL be ups and downs; that is part of the market. Again, keep in mind your profile. For those of you who are overwhelmed and overly cautious, or those on the other end of the spectrum who tend to be less fastidious and concerned, you may want to pay the fee and work with an advisor. For you, this may limit the losses that you would ultimately create by changing your portfolio every time there is negative financial news.
Now, let’s put all of this together for your portfolio. Again, this is an overview and each person’s portfolio should meet the financial needs and goals of that individual. Basically there are three broad categories.
- Income Portfolio: 70% to 100% in bonds.
- Balanced Portfolio: 40% to 60% in stocks.
- Growth Portfolio: 70% to 100% in stocks.
It is best not to be 100% in all one asset group but rather to have a healthy mixture. Here are reasons why a mixture is better. Let’s look at 100% bonds first such as is noted in the Income Portfolio, the first asset model. Looking back from 1926 to 2018, using historical data from Vanguard, regarding the risk and return of different portfolio allocation models, portfolios that were 100% bond-based experienced an average annual return of 5.3%. Even in the best year, 1982, portfolios that were 100% bond-based saw a return rate of 32.6%. Looking at the worst year, 1969, it fell 8.1%. So, looking over the 93 years of data collected by Vanguard, a 100% bond-based portfolio lost value in 14 out of 93 years. That is a reason not to have 100% of your portfolio invested in bonds.
At the same time, you also may not want to have 100% of your portfolio invested in stocks as noted in the Growth Portfolio. Again using data from Vanguard, a portfolio that is made up 100% by stocks had an annual return of 10.1%. According to Vanguard, 1933 was its best year during which time there was a 54.2% return rate, but 1931 was the worst with a decline of 43.1%. A portfolio with 100% stocks lost in 26 of the 93 years of Vanguard’s data collection and analysis.
Let’s go back to your financial profile. What type of investor are you? Stocks over the long term, and it needs to be over the long term, have a high rate of return but also have a higher incidence of volatility. How much, according to your level of comfort, can you handle?
Putting your portfolio together should be more inline with something like a Growth Portfolio, especially for long-term retirement investors. But, once you choose the asset allocation model that you think would work best for you, you need to figure out how to implement it. There are three simple allocation portfolios you can use for each of the three classifications: Income Portfolio, Balanced Portfolio, or Growth Portfolio.
The One Fund Portfolio: Your portfolio does not have to be complicated or complex. You can begin your portfolio with an asset allocation model with just one target date fund called (TDFs) or a One Fund Portfolio. This is how most 401K plans work. They offer target date retirement funds, dividing your money between stocks and bonds, thus accomplishing two important goals. They also often include both domestic and international stocks and bonds as well as small and large companies all within one fund. Because it is a target date fund, as the investor nears the predetermined date which is usually the age of the individual’s retirement, the fund gradually shifts from higher stock to higher fixed income investments. Or in other words, more heavily invested in bonds to help reduce the volatility in the portfolio since the investor will need the money amassed to help pay expenses during retirement. TDFs usually are classified by the date that the investor wants to retire such as the Vanguard Retirement 2055 fund (VFFVX) for those who want to retire in 35 years. There are a few things also to keep in mind with TDFs: the fund fees can be expensive, so they may not be suitable for a taxable account, and there is not a requirement for you to invest in a fund that matches the year of planned retirement.
The Two Fund Portfolio: Let’s go back to your financial profile. If you like more control, you might prefer a two fund portfolio. For this portfolio, you could split your investments between stocks and bonds. The portion allocated for stocks could be invested in a total market index fund, with both United States and international companies. The portion allotted to bonds could be apportioned to a bond index fund. This particular portfolio is easy to implement the preferred stock to bond ratio. Listed below are two possible mutual funds that you could utilize in a two fund portfolio from Vanguard:
These funds would offer good diversification in your portfolio. The Vanguard Total World Stock Index fund has investments in over 800 companies worldwide, and the Vanguard Total Bond Market Index fund invests in over 9,000 bonds.
The Three Fund Portfolio: Another way to set up your portfolio with even more diversification would be the three fund portfolio method. Again using Vanguard, a three fund portfolio could look something like this:
- Vanguard Total Stock Market Index Fund (VTSAX)
- Vanguard Total International Stock Index Fund (VTIAX)
- Vanguard Total Bond Market Index Fund (VBTLX)
You could also do the same thing using another investment company such as Fidelity or Charles Schwab. Here is another scenario of a three fund portfolio using Fidelity:
- Fidelity Zero Total Market Index Fund (FZROX)
- Fidelity Zero International Index Fund (FZILX)
- Fidelity U.S. Bond Index Fund (FXNAX)
You will want to stick with one broker such as Vanguard, Fidelity, or Charles Schwab, so you do not incur a transaction fee. You do not want to be charged a $75.00 transaction fee by picking Fidelity funds at Vanguard. Fees can add up quickly, so be cognizant of them.
Diversified Portfolio – More Complicated: For those of you who want to go beyond the three fund portfolio, to get a little more complex and diversified, here is a portfolio that may fit your financial profile and age. This scenario could work for a thirty something, aggressive investor who wants an aggressive growth portfolio for his or her IRA and wants to spread his or her risk across the global economy.
- Total US Stock market: 60%
- Total International stock market: 15%
- US Real Estate fund: 10%
- US Small cap value: 10%
- Total US Bond market: 5%
This portfolio allows the investor to spread risks to different parts of the market while also keeping 85% in equities, 10% in real estate, and 5% in bonds. Keep in mind that this is a Growth Portfolio, so 70 to 100% equities would be a goal which the investor would be able to achieve in this model.
Working Your Plan: Overall, the key is not to make investing too complicated and complex. This is often the worst idea and is one that leads to failure. My overall advice is to keep things simple. Here are a few simple rules to always keep in mind for your investment portfolio.
- Choose one to five index funds or exchange-traded fund (ETFs) and diversify
- Turn on dividend reinvestment
- Set up automatic investments
- Don’t sell anything until you plan to withdraw this money
Following this information will help set you up for success if you follow this information.
Conclusion: Because there are so many variables and nuances, and even more importantly because portfolios are personal, there is not one simplistic answer to the question of which stock a person should invest in or what to include in a portfolio. The better question really is how to invest and put together your portfolio allocations to best meet your long term financial goals. My goal here is to give you the best information and tools, so you will feel comfortable to successfully build your portfolio. You are the one to answer the question: What should I include in MY investment portfolio? You are the key. With this information, you can confidently create YOUR unique portfolio that will meet your goals and needs. Keep it simple and not overcomplicated. If you have any doubts or questions, you can always contact me. I look forward to being a continual resource to you and to helping you during the financial part of your life. Stay tuned for more things about budgeting, debt management, investing, and more. Follow me on Budgetdog, Twitter, TikTok, and Instagram.