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

China to use new test to prevent Ebola
Beijing, Nov 28 (IANS) Chinese health authorities have approved three home-grown Ebola test reagents to be used for preventing the virus' spread.
 
 
Uganda, UN sign $6.5 mn deal for Ebola fund
Kampala, Nov 28 (IANS) Uganda and UN agencies operating in the country have signed an agreement to establish a 6.5 million dollar Ebola and Marburg Response Fund.
 
 
Ebola virus detected in semen three months after symptoms end
Geneva, Nov 28 (IANS/EFE) The World Health Organisation (WHO) warned Friday that the semen of men recovering from Ebola can contain the deadly virus up to three months after the symptoms disappear.
 
 
Hitachi evinces interest in developing Andhra ports
Hyderabad, Nov 28 (IANS) Japanese multinational conglomerate Hitachi has shown interest in developing ports in Andhra Pradesh.
 
 
 

Latest from the Network

Abigail Breslin slams ex Michael Clifford
Abigail Breslin has slammed her ex, Michael Clifford. The 'My Sister's Keeper' actress went on a date with the 5 Seconds of Summer guitarist last year but it seems as though it didn't end well after she released a song...
Read more on Celebrity Balla
 
Kevin Bacon to sizzle in Jungle
Kevin Bacon is to star in 'Jungle'. The 56-year-old actor will appear in the survival drama, which is based on the true story of Yossi Ghinsberg, an adventurer who found himself lost in the Amazon rainforest for three...
Read more on Movie Balla
 
Mickey Rourke to return to boxing at 62
Mickey Rourke will return to boxing aged 62. The actor will come out of retirement and step into the ring tonight (11.28.14) for the first time in 20 years as he competes against 29-year-old Elliot Seymour. He said: ''...
Read more on Celebrity Balla
 
Kristen Stewart: Actors are isolated
Kristen Stewart claims actors become ''isolated'' because of their fame. The 24-year-old actress has become one of the biggest movie stars in the world following her portrayal of Bella Swan in the 'Twilight' franchise...
Read more on Celebrity Balla
 
Burt Reynolds to sell memorabilia
Burt Reynolds is selling over 600 personal items to stave off bankruptcy. The 78-year-old Hollywood star is reportedly struggling financially so will see awards, cars and costumes go under the hammer in Las Vegas next...
Read more on Celebrity Balla
 
Eddie Redmayne's fear of failure
Eddie Redmayne has a fear of failure. The 'Theory of Everything' star has admitted that like fellow actor, Rachel Weisz, he worries about ever getting hired again. He said: ''I was reading an interview with Rachel Weisz...
Read more on Celebrity Balla
 
Where to Find Black Friday Car Deals
The Black Friday Car Sales events have gained traction over the past couple of years. This year several major brands ran nation-wide commercials announcing their Car Black Friday deals. In the beginning it was creative...
Read more on Auto Balla
 
Indian Aces win inaugural IPTL tie
Manila, Nov 28 (IANS) The much-awaited inaugural International Premier Tennis League (IPTL) got off to a flying start with the Indian Aces notching an impressive 26-16 first victory against the Singapore Slammers at...
Read more on Sport Balla
 
Australian navy's largest ship commissioned
Canberra, Nov 28 (IANS) HMAS Canberra, a 27,000-tonne landing helicopter dock (LHD), was commissioned Friday, providing the Royal Australian Navy (RAN) with one of the world's most capable and sophisticated amphibious...
Read more on Politics Balla
 
Sindhu, Prannoy enter Macau Open semis
Macau, Nov 28 (IANS) Indian shuttlers P.V. Sindhu and H.S. Prannoy came out with contrasting wins to enter their respective semi-finals at the $120,000 Macau Open Grand Prix Gold here Friday. While defending champion...
Read more on Sport Balla