WASHINGTON — When you have money that you want to invest, whether in your 401k or in a personal brokerage account, it can be difficult to know how to go about doing it.
There are literally tens-of-thousands of investment choices, and deciding which ones and how much of each to own can be overwhelming. To help you get started, I put together a road map that’s similar to how we approach building portfolios for our clients at Glassman Wealth.
Before making any moves, here are a few things to consider.
1. Have a plan
The expression goes, “If you don’t know where you are going, any road will get you there.” The same is true for building a portfolio, regardless of the goal for this money.
First: Decide what you want to accomplish. Are you seeking to grow your capital, preserve your capital or something in between?
Second: How long will you keep this money invested? Typically, the longer you have to make your money work for you, the more benefit you’ll get from compounding the returns.
Third: What is your tolerance for potential losses? If it’s high, then owning more stocks or stock funds and fewer bonds is likely the right mix. If your risk tolerance is low, then a portfolio of more bonds may be in order.
Fourth: Will you be investing the money all at once or adding to it over time? If it’s all going in at one time, there’s a risk that your timing might be poor (think 2000 or 2008). If you’re investing over time, you’ll benefit from variations in market prices.
Finally: When will you need to spend this money? If you need a lot of it soon, then you can’t afford to risk a big loss in your portfolio. If you have time on your side or don’t need to pull much from your portfolio, you likely can afford to take greater risk (more stocks).
2. Select your investments
Now that you’ve created a plan and set goals for your money, it’s time to build your portfolio. Should you buy individual stocks, invest in professionally managed funds or have a mixture of both? Should you invest only in U.S. companies or invest more broadly? What about other asset classes — REITs or commodities? There’s a lot to decide.
Most seasoned investors agree that diversification is one of the most important considerations when investing. When you diversify your portfolio, you invest in a broader set of assets that typically don’t all move in the same direction (up or down) at the same time.
Having a broader portfolio structure potentially increases your chances of investing success while reducing the overall risk in your portfolio. Two good resources to learn more about mutual funds and Exchange Traded Funds (ETFs) are Morningstar.com and ETF.com.
The same is true for having exposure to other investments, such as real estate investment trusts (REITs), energy infrastructure and even commodities.
These can move independent of stocks and bonds, so they add a potential layer of protection against all of your investments declining at the same time. Keep in mind that during extreme times, such as 2008, many of these diversifiers moved in the same direction -— down.
The markets have historically provided good return opportunities globally, and not just from domestic stocks, so consider these as you put your portfolio together.
Read: A Review of the Worst Investing Strategies
3. Be active and passive
The biggest investment debate over the past couple years has been over which strategy is better: paying fees to mutual fund managers who aspire to beat the markets, or a more passive approach where you just buy an index fund that represents the market for a very low fee -— similar to what Vanguard has suggested for years.
While there are good arguments on both sides for being with all active managers or all passive managers, I believe that the best answer is “yes” to both.
This hybrid approach simply divides the markets into areas of greatest and least opportunity and efficiency. For example, trying to consistently beat the S & P 500 is incredibly challenging, as there are few inefficiencies available to exploit. Using a passive approach here may make the most sense.
However, there are always market segments where the opportunity is broader and inefficiencies are greater. A couple that come to mind are international small company stocks and emerging market stocks. If you took a passive or indexed approach to emerging markets stocks, today you would own a ton of underperforming companies in Brazil, Russia, India and China.
Instead, I believe your emerging market portfolio should own companies with exposure to the growing needs for health care, financial services, transportation and every day basic goods in these countries. In this case, hiring active managers may potentially bring better results.
4. Consider hiring a pro
If you don’t want to make all of the investment decisions for your money or don’t feel equipped to do so, my advice is to seek professional help for structuring your portfolio and managing your investments.
Why? Financial advisers have the experience of investing for their clients through various markets, such as the tech bubble, the mid 2000s recovery and the most recent great recession. This wisdom can’t be learned from a book or seminar. They also have a depth of investment knowledge and access to information, like speaking directly to the fund managers, which individual investors don’t have.
Read: 4 Key Impacts a Financial Advisor Can Have on Your Portfolio
5. Recognize what you cannot control
The most important part of being a good long-term investor is recognizing two key things.
First, the markets often have a mind of their own and don’t act as you might expect. Many economic and political events that impact markets are out of our control.
Second, investors are human and often react emotionally rather than rationally to market highs and lows. Fear and greed are natural human emotions, but they are counterproductive to long-term investing success. Making a plan and having the discipline to stick with it through thick and thin is truly the best way to achieve your goals.
