A Holy Grail Investment Portfolio To Help You Sleep At Night And Invest Your IRA.
Make no mistake. Investing is the best way to build wealth and secure a brighter financial future. Traditional or Roth individual retirement accounts (IRA) are two important tax-advantaged accounts that can help you accomplish these two important things. For the newbie investor, it can be hard to select the right investments or securities for an investment account. In this article, I outline a simple, yet robust, investment portfolio that is sure to minimize risks and maximize returns for years to come. When it comes to investing, you have options--lots of them!
Mutual (index) funds, exchange-traded funds (ETFs), stocks
A 401k is a great way to invest in the stock market. It is usually offered by an employer. For people who may not have access to an employer-sponsored 401k retirement account, Roth and traditional IRAs are two solid tax-advantaged alternatives. Differentiating between the pros and cons of a Roth or traditional IRA is beyond the scope of this article. You can learn about Roth and traditional retirement accounts here. Whether or not you choose to open a traditional or Roth IRA, one thing is certain: you have a broad range of investment options at your disposal. Among them are mutual funds, ETFs, stocks, bonds, among other securities. Here's a nice summary on ETFs, stocks and index funds. When I developed this simple investment portfolio, I considered a few investing parameters to help maximize returns. These include diversification, a long-term approach, fees reduction and simplicity. You cannot have a solid investment portfolio without diversification.
Investing requires diversification.
Diversification is essential to investing. Diversification is the simple process of putting your money in different asset classes or sectors to minimize financial loss. For example, if you invest your money in only one asset class or sector and that sector suffers a financial downtown, there is a high likelihood you will incur a financial loss. On the contrary, if you spread your money across different asset classes, and one sector falters, the other assets in your portfolio may protect your investments from stock market losses. Besides investment diversification, any investor must keep in mind that investing requires a long-term commitment.
Investing requires a long-term commitment.
Wealth is not acquired overnight; it is a long-term commitment. Robert Lloyd, an English poet and satirist, in reference to the "Tortoise and Hare" fable, famously said "slow and steady wins the race." This same basic principle can be applied to investing. Investing is not a sprint; it is a marathon. As such, any investor should exercise patience, perseverance and discipline when deciding to invest and save for retirement. Besides diversification and a long-term approach to investing, my simple investment portfolio seeks to maximize returns by reducing fees, among other approaches.
Investing should be cheap and maximize returns.
Brokerage and other investment fees will devour your returns, if you are not careful. A brokerage fee is a fee charged by an investment broker each time an investor buys or sells a security (stock, exchange-traded funds, etc.). If you are actively buying and selling securities, you can see how such fees can diminish your returns. Besides brokerage fees, expense ratio fees are investing fees to be mindful of. What is the expense ratio (ER)?
You can think of the expense ratio as the cost of doing business or investing in a fund. The expense ratio is the amount of money a mutual fund or ETF shareholder pays in expenses to help cover the fund's expenses. This fee covers the fund's operational expenses (e.g. marketing, record-keeping, management, etc.). The ER is usually expressed as a percentage. If you buy an index fund or ETF with an expense ratio of, say 0.045%, you can expect to pay $4.5 for every $10,000 you invest in that fund. It is paid annually as a deduction from your account. Low expense ratios can help you maximize your returns. If you are not careful about ER fees, they can cause your investment returns to hemorrhage (bleed) in the investing emergency room (ER)! Fortunately, my simple investment portfolio is built around low expense ratios.
Investing should be simple.
A central mission of this blog is to empower people to invest and build wealth. Because I believe investing should be simple, my investment portfolio is built around simple index funds. In fact, legendary investor Warren Buffet endorses index funds. The benefits of index funds investing are numerous. Here are just a few advantages.
- Index funds investing obviates the need for a fund manager. They are passively managed, so you don't need an "expert" picking and selling stocks for your portfolio. If you want to become an expert stock picker, click here.
- Index funds are cheap. They usually have low expense ratios.
- Index funds offer great diversification. As mutual funds, they are composed of a basket of stocks.
- Index funds beat most actively-managed funds. The goal of active fund managers is to generate higher returns than index funds. Most of them fall short! Sad.
- Index funds save you time. You just pick the index fund, and let the market do the rest! Your time is valuable; do something better with it.
Now that I've outlined the strategy behind my simple investment portfolio, it is now time to reveal its composition.
A Holy Grail investment portfolio for the newbie investor
My simple investment portfolio seeks to minimize financial risks and maximize returns. It is based on criteria outlined above. Without further delay, here's what the composition of your investment portfolio should look like. For a better discussion on the different types of cap funds (cap = capitalization) referenced below, click here. Recommended investment percentages are for an individual who is decades away from retirement.
- A large cap S&P 500 index fund (40% to 50%). A S&P 500 large cap fund should occupy the bulk of your investment portfolio. Large caps are companies with market value of $10 billion or more. If you invest in a S&P 500 index fund, you automatically have access to America's 500 largest companies!
- A mid cap index fund (20%). A mid cap fund gives you exposure to companies with market value between $2 billion and $10 billion dollars.
- A small cap index fund (5% to 10%). Small cap funds are companies with market value between $50 million and $2 billion dollars.
- An international index fund (10% to 15%). The stock market is more than the U.S. economy. It is essential that your investment portfolio include foreign stocks. If U.S. stocks experience a bear market, your foreign investments can help provide financial cushion to your portfolio, while your U.S. equities recover.
- An emerging market index fund (5% to 10%). An emerging market fund gives you access to emerging countries' stock markets. Emerging...Huh? Emerging markets are simply countries not considered developed like the USA, France, Germany, etc. Emerging economies include China, Brazil, India, Russia, among others.
- A bond index fund (10%). A bond index fund invests in, wait for it, bonds! Here's more information on bond funds. Bond funds are composed of a basket of bonds. They should occupy a certain percentage of your portfolio. There are reasons why you may not need bonds in your IRA.
The bottom line
Investing gives you the best opportunity to save for retirement. Choosing the right investments for an investment portfolio presents challenges for investors, especially a novice investor. When considering securities for an investment account, it is essential that an investor considers diversification, a long-term approach, fees minimization, investing simplicity, and returns maximization. I think this is a robust investment portfolio that, once you set it up and forget about it, will put you on a path to a brighter financial future.
Here are a few investment brokers and robo-advisors I think can provide you with a simple investment portfolio, if you don't feel comfortable investing on your own.
- Wealthsimple. This robo-advisor will help you diversify your investment portfolio across the entire market, using low cost ETFs. They even show you how much your money can grow with their simple-to-use investment simulation calculator. Start investing with Wealthsimple today.
Like this article? Please share and leave us your feedback in the comment section to help us improve and grow. Subscribe below to get our latest articles. Here are a few more articles you may find useful: How to make money in real estate without buying physical properties | How to use your tax refund | Cash is trash, not king. Invest it | How to buy and invest in marijuana stocks | Acorns reviews: How to earn free money.