3/6/2014 5:30 PM ET|
The basics of building a portfolio
Investing for retirement takes more than just picking a couple of stocks. Here's how to lay a solid foundation for your financial future.
Retirement investors often hear that they should build a portfolio, rather than picking individual stocks based on tips and gut feelings. Easy to say but, for a long time, it was hard to do.
Pension funds and universities really understand portfolio building, as do many wealthy individuals. For all the blather you hear on TV about which stock or sector a famous-name investor supposedly will buy next, the fact is rich people do not often take all-in risks.
Rather, they keep their money in a variety of asset classes. The rich also regularly rebalance -- they sell the investments that have gone up and use that cash to buy those that have fallen -- and they own more conservative investments than you might guess.
How can you build a strong retirement portfolio? Here are the basic principles:
A "three buckets" approach
A cash cushion of three to six months of expenses is crucial. It helps you avoid selling at the wrong time to raise money for, say, a hospital visit or a car accident. The second bucket is your retirement investments. It should be the largest component and handled as inexpensively and consistently as possible. This is your '"core" portfolio.
The third, if you are disposed to trading, is the "explore" bucket, money you don't mind losing if a stock doesn't work out. You don't have to trade. If you know you will, however, keeping that money separate from the core portfolio protects you from emotional trading errors.
Avoid unnecessary costs
Inside the core portfolio, it's vitally important to keep costs minimized. Own index funds or index ETFs rather than expensive, actively managed mutual funds. You can easily lower management costs, taxes and commissions by owning ETFs inside an individual retirement account (IRA).
Costs matter. John Bogle, the founder of the Vanguard Group, figures management fees over the long haul eat up to 80 percent of your potential gains. Fund managers and other Wall Street types put up nothing and risk nothing but keep up to 80 cents on every dollar you gain. It's shocking once you realize it.
Diversification is a virtue
When you first start using truly diversified investments the feeling can be deflating. Why invest if you don't get to pick the companies?
The answer is simple enough: You will pick the wrong ones. Most people chase investments that have been hot recently, buying them just in time for a decline. Once they buy the high, they ride it down to the low and then cash out. Yet, many times, a down stock soon recovers.
Diversification lowers this risk by cutting off your emotional attachment to a single company or sector. It protects you from yourself.
Ordinary retirement investors can and should build their own investment portfolios, and they can do so cheaply using the same, proven portfolio tools afforded even the fanciest university endowments.
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...and do not forget dividend stocks. These are the ones that will help you through the rough times of share price drops and help keep your emotional temperament on somewhat of an even keel --- well, at least keeping you away from rooftops and cliffs.
No one can pick all winners when it comes to growth stocks that don't pay dividends. We all end up picking a few but everyone needs some dependable (almost dependable) income arriving from being in the market --- yes?
If pension funds really understand portfolio building why are so many of them underfunded ?
Good basic advice. I would also point out that diversification doesn’t only have to be across asset classes. You can also diversify with different investment strategies, different time frames, geographic regions, and more.
I have all three buckets mentioned in this article and more. But, my security cash bucket is two years, not six months, and my spec-trading bucket is more like a tea-cup.
Lerner=Betrayer of the American People
I agree with the concept of a three bucket approach to investing. My parents taught me the value of living within your means, staying out of debt, savings your money, and having a rainy day fund. I have been working since I was in my teens and have always been a good savor. I learned to be a good investor when I was in my thirties.
I am in my fifties and have learned the value of having at least six months’ worth of expenses in a cash account. I believe in having a lot more than six months of expenses on hand. I have been downsized a couple of times during my work career and had to start over. I had enough funds in my cash cushion to cover my expenses during that stressful time. Having a rainy day fund gives me peace of mind. I also find it handy when an unexpected expense comes up. Last year I had to buy a replacement for my twelve year old car. I did not have to sell any of my investments or take out a loan. I just used the money in my cash account.
I find it important to have money invested in retirement and taxable accounts. In my retirement accounts I do my best to fully invest in my 401IK and IRA plans. My company matches a portion of my contributions and I take full advantage of the company match. I am well diversified in my retirement and taxable accounts.
I have found out having a mixture of stocks, bonds, mutual funds, REITs, and other investment vehicles is a good way of achieving wealth and limited risk over time. I also limit risk by diversifying equity classes. I own a wide variety of dividend paying, high growth, international, small, mid, and large cap stocks and mutual funds.
You can start small and grow your investments steadily over time. I purchased a lot of my individual stocks in dividend reinvestment plans (DRIPS). I started with small acquisitions, enrolled in the DRIP plans, and grew my position with additional purchases and through reinvesting the dividends. There is a lot of truth investing young and watching your savings grow though the magic of compounding.
The most important ways of building a portfolio is starting young, have short-term and long-term goals, stay out of debt, having a rainy day fund, and have an investment and retirement plan.
"headline: "Obama urges Putin to consider diplomacy
Obama is a fool and or an idiot. What part of "Russia wants to take Crimea for himself" is Obama incapable of understanding? Obama, and Kerry live in a fantasyland."
This is, but really isn't, off Topic as our Future has been based on containing Government Spending Levels and building Global Partnerships. This will influence what returns will be in the future. If you doubt that, look at Corporate Quarterly Reports and see how much Growth now comes from over seas. Also look at how we support Dictatorships and hide behind the notion of protecting Democracy.
The political cherry picking is just that.
Before you can build any solid performing portfolio, you have to build that trust & respect with whom your investing with.
And this goes for any government position as well- including the POTUS. Well- I can say, with much confidence that most of us don't trust him-He's a LIAR!
And respect ? Why, he couldn't even spell it (R-E-S-P-E-C-T) when honoring Aretha Franklin !! And now he's in So. Florida lecturing kids in our schools ? Maybe Michelle should just do the speaking to the kids- at least she can spell above grade school levels !
headline: "Obama urges Putin to consider diplomacy
Obama is a fool and or an idiot. What part of "Russia wants to take Crimea for himself" is Obama incapable of understanding? Obama, and Kerry live in a fantasyland. They live in a world where they have no concept that people , Putin for Example don't think the way he does, and don't act the way he thinks they should. The guy is an idiot. Since Obama can not think of a reason why Iran would like nuclear weapons he thinks all he has to do is say Iran does not need nuclear weapons and go talk to them and SURELY THEY WILL SEE THINGS the way he does. NEWS FLASH Russian has NO REASON to "pursue diplomacy" HE WANTS to rebuild the Soviet Union, he wants the Crimea. Why would he then go to the UN as ask if he can have it?
I think if I hauled off and punched Obama in the face he would negotiate with me since he could see in his mind no reason why I might want to hit him (WHICH I DON"T BY THE WAY, but for illustration purposes). He would say to me let's negotiate. I hit him again. He would say , please don't do that. I hit him again. He says " do you know it hurts me when you hit me like that" I hit him again. How many time would I have to hit him before it would dawn on him that I am not interested in negotiating and only interested in hitting him? I would say, FOREVER. He is clueless. Lives in a fantasyland where everyone thinks like he does and everyone WANTS to get along and everyone WANTS to negotiate. IDIOT.
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