How to Divide up Your Investment Portfolio to Achieve Killer Returns

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It occurred to me after writing the article 3 Ways to Take Control of Your Money and Build a Better Life that I covered all about how you should invest your leftover income, but I don’t tell you much about what to invest in. I mentioned some good apps to get you started, but I want to make sure that none of you make the same mistakes I made. 

So, let’s talk about how to divide up your investment portfolio.

The first time I decided to start investing, I took a fistful of dollars and bought stock in a few companies that I knew and used like Apple, Microsoft, and Starbucks. These investments served me fairly well. Most of them grew in the few months that I held them, but I soon realized that I’d made a huge mistake.

I’d failed to do possibly the most important step when investing your money, diversifying.

Many of my stocks were in the same market sector, so if technology were to take a sudden dive for whatever reason, I would’ve been…up a certain, smelly creek without a paddle.

I want to make sure that you diversify your portfolio, so you can rest easy at night knowing your money is as safe as it can be.

I mean if you’re only going to throw your money into Acorns, then you have nothing to worry about. Acorns does a great job at allowing you to select the level of aggressiveness you’d like your portfolio to have while still maintaining good diversity through exchange trade funds (ETFs).

On the other hand, if you’re more interested in using apps like Robinhood, Stash Invest, or some other brokering account, then you’ll need to know a bit about diversity. It’s really easy to pick out a few blue-chip stocks like I did, such as Apple and Microsoft and then call it a day feeling reassured that your money is safely tucked away and earning a good return. But you’d be DEAD WRONG!!!

While there’s nothing wrong with either one of these companies (in fact, they’re pretty excellent choices in terms of growth and risk), you’d be a fool to invest only in these two companies.

“Why?” you may be asking yourself. And my answer is, “because your money is not well-diversified.”

As mentioned before, if you are looking for an app that will do all the work and diversify your money FOR you, you can check out Acorns (my full review of Acorns is here).

What Is An Investment Portfolio?

An investment portfolio is basically just the collection of what your’e investing in. Maybe it’s just stocks, maybe it’s a mix of stocks and ETFs, etc. The goal is that your investment portfolio would be fairly well-diversified, as mentioned above.

What I mean by well-diversified is basically that your money is appropriately spread across multiple asset classes and market sectors. If this definition confused or freaked you out a bit, just take a deep breath!

Sorry for that kind of technical description. To better explain what I mean, here are some definitions.

Asset class – the TYPE of investment (e.g. stocks, bonds, real estate, other wealthy people words)

Market sector – the…well… sector of the market these assets are in (e.g. oil and gas, technology, transportation, entertainment, etc.)

 

The Importance Of Diversification In Your Investments

 

So WHY would we want to put our money in all these different places? Wouldn’t that just make it harder to keep track of? I mean maybe, but the benefits are WAAAAAY outweighing the cost here.

To explain why you should invest in different asset classes and market sectors, I’m going to borrow the analogy of an umbrella salesman from the book A Beginner’s Guide to Investing.

Imagine a guy on a street corner selling umbrellas.

Since most people don’t exactly plan for rainy days (haha), this man’s peak business is going to occur on those days where it’s coming down HARD. So unless this man lives in Seattle, he’s in trouble. Why? Because on sunny days, people won’t buy his product. Actually, Seattleites (that’s a weird word) are probably used to the rain and do actually plan for it. So maybe this isn’t the best analogy but just roll with me for a sec.

What can he do to make up for his lack of sales on those days? One way is to sell a different product. If he sells sunglasses on the days that it’s not raining, then he’ll be able to have a pretty consistent source of income between the two (provided he doesn’t suck at his job).

This is the equivalent of investing in different asset classes. During times when stocks aren’t performing well, other parts of your portfolio like bonds and real estate should be able to make up the difference, and vice versa.

Now, for why you shouldn’t invest all your money into one sector, let’s think about the last time the price of oil dropped significantly. What do you think happened to the stock prices of every last oil company? (Hint: They didn’t go up.)

Having your money completely tied up in a single sector can lead to your net-worth taking a PLUMMIT during a bad year for that market which can take quite a while to recover from. What if you were living off your assets at that point (like during retirement)? You’d be super *bleeeeeeep*!!

Having learned the importance of why you should diversify your assets, you’re probably starting to wonder how to do so. I mean what’s the right way to slice the pie?? Obviously, if we’re talking actual pie, you’ll just give it to me. Especially if it’s pecan, chocolate, or… you know what? Doesn’t matter what kind. Just give it to me.

 

Slicing The Pie

 

At this point, you may be asking yourself, “How do I decide how much money to put where? Do I do an even split? Do I pretend it’s a new D&D character and roll dice? Do I get a palm reading??”

The answers to your questions are, in this order:

• Patience, you must learn, young padawan. Getting there, I am.
• No.
• No.
• Definitely not; don’t spend your money on that.

And the real answer to how much money goes where is………..it depends on your goals. Someone young with (hopefully) a lot of life ahead of them is going to have a very different portfolio from someone in retirement. The goals you have are going to at least partly determine how to build an investment portfolio that matches your needs.

Basically, your asset allocation (Boooo! Scary words, I know) is determined by two things.

1. Growth Goals

If you’re just starting out, like me, then your goals for your portfolio may be more than just beating inflation.

You may want to see some aggressive growth to help increase your portfolio’s value over the next decade or so. Someone with similar goals will need to invest largely in equities such as stocks or real estate.

However, they will also have to take on more risk with these investments.

On the contrary, if you’ve already built up or have otherwise come into a large amount of wealth, then you may want to protect its value and reap its returns rather than see it grow.

In this more conservative approach, you’ll need to invest more money in fixed income securities like bonds, maybe high dividend paying stocks, or certificate of deposits (CDs). Someone with this type of portfolio will see significantly less growth but will also take on significantly less risk.

2. Risk Tolerance

In addition to your growth goals, your portfolio will also be shaped by your risk tolerance.

This is, more or less, how much of a dip in your value you can stomach without too much stress.

Those of you with cold feet may feel more comfortable with simply investing most of your money in bonds, CDs, and a few high dividend stocks to help cover inflation.

If you have an iron gut, then maybe try your hand at small-cap equities or cryptocurrencies which have high return potential. Unfortunately, they also come with a much higher risk. And if cryptocurrencies aren’t able to give you the returns you want, then maybe try your hand at the roulette table. I hear the returns on 22 Black are going to be stellar this year.

Once you’ve taken some time to decide what kind of growth you’d like to see and how much risk you’re willing to take on, we can begin slicing the pie.

 

How To Build An Investment Portfolio

 

I’m going to list out three portfolios in the order of increasing risk and growth potential. For each of these portfolio models, I’ll also give a chart recommending how to allocate your assets.

 

1. Moderately Conservative Portfolio

 

• 55-60% Fixed-income securities
• 35-40% Equities
• 5-10% Cash and equivalents

The intention of this portfolio is largely to maintain its value over a long period of time. If you invest in securities that yield a high dividend and you have a large portfolio, then you’ll likely be able to live off of your dividends. This is basically where you want to be for retirement.

If this seems like too much risk for you, then I suggest you go to Oz and ask for some courage. Nah, I’m just kidding! You can go more conservative than this portfolio, but I personally wouldn’t just to ensure I’m getting protected from inflation. Nothing hurts worse than to find out that your portfolio grew 10%, but the dollar’s value decreased by 20%.

Suggested Asset Allocation

TIPS (Treasury Inflation-Protected Securities)	20%
U.S. Treasury Bonds	20%
CD (Certificate of Deposit)	15%
U.S. Stocks	20%
U.S. Real Estate	15%
Cash (or Commodities like gold and silver)	10%

 

2. Moderately Aggressive Portfolio

 

• 50-55% Equities
• 35-40% Fixed-income securities
• 5-10% Cash and equivalents

With a moderately aggressive portfolio, you’re looking for good growth and good income. Because of this and the almost equal split between equities and fixed-income securities, portfolios following this model are typically called balanced. You’ll want to choose this model if you’re looking for growth over a long timeframe with moderate levels of risk.

I’d wager that most people would fall here. If you’re not looking to retire anytime soon, then you’ll probably want a portfolio at least this aggressive. But if you won’t be investing for long (less than 5 years), you’ll likely want to be more conservative with your money since the risk associated with this type of portfolio could lead to short-term losses.

Suggested Asset Allocation

U.S. Stocks	25%
U.S. Real Estate	15%
International Developed-Market Stocks	10%
TIPS (Treasury Inflation-Protected Securities)	20%
U.S. Treasury Bonds	20%
Cash (or Commodities like gold and silver)	10%

 

3. Aggressive Portfolio

 

• 65-70% Equities
• 20-25% Fixed-income securities
• 5-10% Cash and equivalents

If your goal is to obtain long-term growth and your tolerance of risk is fairly high, then you may want to consider an aggressive portfolio. This model consists mostly of equities to maximize growth potential. Although to keep its risk from getting too high, there’s also a decent amount of fixed-income securities.

Of course, if you’re feeling brave, then you could make your portfolio even more aggressive by removing the fixed-income securities to zero. I personally wouldn’t recommend this though as your portfolio would carry a tremendous amount of risk. Your portfolio’s value would have the potential to sway between the green and red in quite a short amount of time.

Suggested Asset Allocation

U.S. Stocks	30%
U.S. Real Estate	20%
International Developed-Market Stocks	15%
Emerging Market Stocks	5%
TIPS (Treasury Inflation-Protected Securities)	15%
U.S. Treasury Bonds	15%

This asset allocation is actually the one I use (with the minor adjustment of including foreign real estate). I like this model because I’m looking to achieve good long-term growth, and I’m not afraid of the risk since I have (theoretically) many years to recover from any losses.

These portfolio models should be able to fit most of your needs, but feel free to fine tune the numbers to better fit your goals and risk tolerance.

 

Final Thoughts On How To Divide Up Your Investment Portfolio

 

Hopefully, this article has given you enough information to help you get started on dividing up your portfolio to suit your needs. But if you’re wanting to learn more, then definitely try to get your hands on the book I mentioned earlier (A Beginner’s Guide to Investing). It’s an amazingly quick read at only 86 pages. It also has a glossary to explain every last acronym and complicated term that you could dream of regarding finance.

It’s definitely my #1 book on investing for new people. The amount of information it packs into those 86 pages is simply outstanding making it one of the best uses of your extra money by far!  I just can’t recommend it enough especially if you have next to no financial knowledge.

And for those of you that are worried that I didn’t give you much to go off on how to invest in these different asset classes in this article, keep an eye out for my next article because that’s exactly what I’m going to cover!

Until the next one,

Noah

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