Investing Basics: Building A Portfolio

Feb 14 2014, 10:40am CST | by

Retirement investors often hear that they should build a portfolio, rather than picking stocks based on tips and gut feelings. Easy to say and, 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 expenses is crucial. It helps you avoid selling 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% of your potential gains. Fund managers and other Wall Street types put up nothing and risk nothing but keep 80 cents on your dollar. 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.

Source: Forbes Business

 
 

Don't miss ...

 

<a href="/latest_stories/all/all/30" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.

 

blog comments powered by Disqus

Latest stories

Europe's Galileo satellites launched into wrong orbit
Paris, Aug 23 (IANS) European satellite launch company Arianespace announced Saturday that the two satellites of Europe's Galileo satellite navigation system launched Friday from the European spaceport in French Guiana were delivered into the wrong orbit.
 
 
UN to radically scale up fight against Ebola
Monrovia, Aug 23 (IANS/WAM) The UN has vowed to radically scale up support to fight the Ebola virus outbreak in West Africa and said more health workers will be brought to Liberia to deal with the disease.
 
 
White dwarf stars formed mysterious supernova
London, Aug 23 (IANS) Supernova 2014J is 11 million light years away from earth and was only seen by chance at the University of London Observatory this year.
 
 
Universe's earliest stars were monstrous: Study
Tokyo, Aug 23 (IANS) Little is known about the universe's earliest stars but if we believe astronomers, they might have been hundreds of times more massive than the sun.
 
 
 

Latest from the Network

Daniel Radcliffe: The best relationships develop from friendship
Daniel Radcliffe believes the best relationships develop when you're dating one of your friends. The 25-year-old hunk insists the strongest of romances take place when you've spent many years being the best of pals...
Read more on Celebrity Balla
 
Iggy Azalea falls off stage at MTV benefit concert
Iggy Azalea fell off the stage during the MTV Video Music Awards benefit concert last night (08.22.14). The 22-year-old singer left fans speechless at the charity gig after she accidentally tumbled into the crowd whilst...
Read more on Celebrity Balla
 
JWoww against facial cosmetic surgery
JWoww won't have cosmetic surgery on her face. The former 'Jersey Shore' star - real name Jenni Farley - is against going under the knife to improve her facial beauty because she's frightened she wouldn't be able to...
Read more on Celebrity Balla
 
Ian Somerhalder and Nikki Reed move in together
Ian Somerhalder and Nikki Reed have moved in together. The couple, who have been dating for the past few months, are reportedly house-sharing in Atlanta, Georgia, so that they can spend as much time together as...
Read more on Celebrity Balla
 
Zardari dismisses need for Sharif's resignation: Government
Lahore/Islamabad, Aug 23 (IANS) The Pakistani government said Saturday former president Asif Ali Zardari has denied any need for Prime Minister Nawaz Sharif to resign over the demand by Pakistan Tehreek-i-Insaaf (PTI...
Read more on Politics Balla
 
Imran Khan adamant on Sharif's resignation
Islamabad, Aug 23 (IANS) Pakistan Tehreek-e-Insaf (PTI) chief Imran Khan Saturday reiterated his protest would continue until Prime Minister Nawaz Sharif resigned and said the meeting between Sharif and former...
Read more on Politics Balla
 
Force India struggle in wet Belgian GP qualifying
Spa-Francorchamps (Belgium), Aug 23 (IANS) Force India drivers Sergio Perez and Nico Hulkenberg had a difficult outing in the Belgian Grand Prix qualifying Saturday and will start Sunday's race 13th and 18th....
Read more on Sport Balla
 
Simon Pegg finds watching himself hard
Simon Pegg sometimes finds it ''hard'' to watch his own movies. The 44-year-old actor - who has five-year-old daughter Matilda with wife Maureen - is very ''proud'' of his work but doesn't enjoying viewing them back as...
Read more on Movie Balla
 
Indian cueists bag Asian title
Karachi, Aug 23 (IANS) India A, consisting of Kamal Chawla, Faisal Khan and Dharmender Lilly, won the Gold medal in the Asian Snooker Team championship here Saturday, defeating Pakistan A 3-1 in the final. The Indian...
Read more on Sport Balla
 
Sri Lanka, Pakistan 2nd ODI shifted to Hambantota
Colombo, Aug 23 (IANS) The second One-Day International (ODI) between Sri Lanka and Pakistan was Saturday moved up to Aug 26 and the venue shifted to Hambantota after heavy rainfall here left the Premadasa Stadium...
Read more on Sport Balla