In the spirit of the new year, let’s build an investment portfolio. Normally, this would be the in the final chapter but, we muscled through financial basics. Time to have some fun. Later, we’ll dive into more advanced trading techniques and then circle back to answer questions and clarify.
You already have investments. Real estate, art, jewelry, and anything else of value. We’re going to focus on the stock market. Most advisors will follow the asset allocation models that have been around for years.
The theme is stable diversification. Imagine your portfolio as a pie. The primary ingredients are Large Cap, Medium Cap, Small Cap, International, and Fixed Income. In other words, big companies, medium companies, small ones and foreign stock as well as bonds and cash. Unlike a pie, which has specific amounts of each ingredient, your proportions will depend on your specific situation and risk tolerance.
A well balanced portfolio will be surprisingly stable. As some investments go up, others go down. The overall direction should be upward but they won’t all run together. Sticking with the theme of diversification, each segment listed above should have more than one or two stocks. How to pick you ask? It’s very easy. In prior months we discussed indexes such as the S&P 500 and the Dow Jones Industrials. The S&P 500 is a perfect example of a large cap index. There are dozens of indexes and they come in all shapes and flavors.
Mutual Funds and ETFs are the easiest way to invest in these indexes. If you have an online broker, you can search for them using their screening tools. Simply screen for a Large Cap Index fund. If you decide your portfolio will be equally weighted, then put 20% in that fund and do the same thing with each of the others.
If you don’t want equal weights, you can make the portfolio more conservative by overloading on the Fixed Income section. If you want the portfolio to be more aggressive, overweight the stock side. The exact mix is up to you. No one can predict the future or the market. Anyone who tells you they can is trying to sell you something.
Be careful if you overweight fixed income. When interest rates rise, bond prices will fall. I’ll explain why when we talk bonds.
So there you go. The bottom line is diversification. It provides opportunity and stability to any portfolio. The market is emotional with wild fluctuations. Ignore the waves and the tides. Ride the current. Focusing on the long term is better than trying to time the market.
Happy New Year