The Ideal Portfolio For You

If you have a 401k, a 403b, a Roth IRA, or a brokerage account, you my friend, are an investor. It may not seem like that especially if you have a financial advisor, an employer, or some other entity looking after your money. However, even if you have someone looking after your money, you still need to know a bit about investing. If not, you risk getting taken advantage of, losing your money, or worse, not understanding how much you may have! Don’t fear - it’s not hard to understand.

So, what is a portfolio?

A portfolio is a term used to describe your investment account along with the investments inside of it. Think of a portfolio like a bag of coins. The bag is your account and the coins are your investments. You may have nickels, pennies, dimes, and quarters in your bag. In your portfolio, you want a diversified mix of investments like the nickels, pennies, dimes, and quarters in your bag. A diversified portfolio means you have investments in different industries. So, if the stock market goes down in one area or industry, it may not go down in another. The goal of a diversified portfolio is to protect you from risk. A portfolio that is not diversified may only be invested in a few things or be invested in one or two industries. If you have an investment account, you have a portfolio, and you need a diversified one.

So, now that you know what a diversified portfolio is, how can you create one of your own?

The rule of thumb to determine your portfolio mix is the following equation: 100 - your age = your mix of stocks and bonds. So, if you are 30, your equation looks like this: 100 - 30 = 70. You should have 70% equities or stocks and 30% fixed income or bonds.

If you’re thinking to yourself, “this still sounds like gibberish,” let me offer a simple piece of advice. If you are only an investor in an employer-sponsored plan, I highly recommend looking into a target date fund. Target date funds are mutual funds that switch their allocation based on the year in which you retire. So, if you want to retire in 2050 you would choose Target Date Fund 2050. Almost all mutual fund companies offer target-date funds. They are usually offered in increments of 5 years, and they slowly switch allocation from being risky to more conservative each year.

Here's why I love them, they are a set it and forget it fund. You pick the fund, you decide how much to invest, and you leave it alone. Target date funds are a cheaper replica of an advisor. What an advisor does is rebalance your portfolio depending on your portfolio mix. Sometimes, when the stock market is doing really well, your portfolio mix gets out of balance. So, if your target is 70% equities and 30% fixed income - it may start to look like 90% equities and 10% fixed income. Your advisor takes money from your equities and puts it into your fixed income funds. So, you are now back in balance of 70% equities and 30% fixed income. Target date funds do that automatically for you. Instead of worrying about a huge portfolio with many different options you now have ONE fund that does all the leg work.

If you don't know where to start building a portfolio, target date funds are the place.

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