This post is a back to basics posts to help new investors get started with their 1st investment portfolio. After setting up a budget, understanding the orders of operations for where to invest next, and deciding to tackle this yourself, it’s time to actually start investing. This is the step where most people get overwhelmed by the choices and sometimes retreat back to a financial advisor. The goal today is to discuss some strategies to set up your 1st investment portfolio.
What’s An Asset Allocation?
Two of the fundamental concepts of modern portfolio theory is diversification and risk tolerance. One is like the horsepower of an engine (risk) and the other is the seat belt or airbags (diversification) to help buffer the impact when you hit the gas too hard or
Now blending these two concepts together can be challenging because of the sheer number of options out there from stocks to bonds or ETFs to
What’s My Blend?
For this part of the discussion, I will go away from the analogy of a car and use pizza dough as my example. If you have ever made
There are some rules of thumb out there that talk about 100 minus your age should be the percentage of stocks in your portfolio. I think this is a little too conservative and changes too quickly for my liking. I don’t think a
|Slowing Down||Late, Retiring Soon||50%||50%|
The Dry Rub
After we come up with a Dry to Wet ratio then we work on the ratio of the dry ingredients. For pizza dough, this is flour, yeast, salt, and sugar and for the stock portion of our portfolio, this is domestic and international stocks. We can get fancy with
Keeping with the KISS theme we will go with a 2/3 – 1/3 blend for our dry ingredients. 2/3 in the domestic stock market and 1/3 international stock market. There are plenty of other suggestions out there that will go higher or lower on the domestic side but with more multi-national organizations and complicated supply chains, this is the split that makes sense to me but like I suggested above you can tweak as you see fit. So how does this look in table format?
|Career Phase||Stocks - Domestic||Stocks - Int'l||Bonds|
|Slowing Down||Late, Retiring Soon||33%||17%||50%|
Where To Buy The Ingredients?
With pizza dough, you have endless options on how to gather and build your dough before putting on the toppings. You can completely D.I.Y. by buying the flour, yeast, salt separately or you can buy a pre-built option like a betty crocker pizza mix bag where you just add water or you could go with the Trader Joe’s pre-made dough that is already mixed and ready to use. These same options are available for your starter portfolio. Each has its pros and cons so the answer is not simple and straightforward. I will lay them out for you and then you can decide for yourself.
D.I.Y. (3-Fund Portfolio)
This is one of the most common recommendations by personal finance bloggers and got popular with the
|Institution||Ticker Symbol||Desc.||Exp. Ratio|
|SCHB||Schwab Multi-Cap Domestic (Stocks)||0.03%|
|SCHF||Schwab Multicap Int'l(Stocks)||0.06%|
|SCHZ||Schwab Multi Bond||0.04%|
|VTI||Vanguard Total Stock Index Fund||0.04%|
|VEA||Vanguard Int’l Index Fund (Stocks)||0.07%|
|BND||Vanguard Total Bond Fund||0.05%|
Sounds simple enough but what happens a couple of months or years from the date of purchase when the stock fund grows more than then bond fund and more specifically the domestic fund grew more than the international fund? Well you need to rebalance to get back to your desired asset allocation. This requires selling some of the stocks and buying more of the bonds or you leave this for when you are investing new money into the portfolio to help with rebalancing.
Keeps you engaged
Manual Tax-Loss Harvesting
Pre-Mixed Bag (Target-Date Funds)
Now if you are starting off and feel intimidated by the idea of buying individual funds, keeping track of the ratios, and rebalancing then there are is another option available … Target-Date Funds (TDF). TDFs are designed based on your estimated retirement age and work backwards to decide a ratio based on how far you believe you are from retirement. Historically these had high expense ratios and didn’t have the best allocations and glide paths (this is how the fund changes the allocation as you get closer to retirement) but with competition and some help from computers these have actually improved. Below are some reasonable options from Schwab and Vanguard.
|Institution||Ticker Symbol||Desc.||Exp. Ratio|
|SWYMX||Schwab Target 2050 Index Fund||0.08%|
|SWYJX||Schwab Target 2055 Index Fund||0.08%|
|SWYNX||Schwab Target 2060 Index Fund||0.08%|
|VFIFX||Vanguard Target 2050 Fund||0.15%|
|VFFVX||Vanguard Target 2055 Fund||0.15%|
|VTTSX||Vanguard Target 2060 Fund||0.15%|
As you can see the expense ratios are slightly higher but not unreasonable for an easy set it and forget it type situation. The one benefit that goes away is tax-loss harvesting. This is where you can claim capital losses on your taxes during downturns or market fluctuations and carry them forward to years where you have a capital gain.
One Fund to Purchase
Set It and Forget It
No Tax Loss Harvesting
Slightly higher fees
Pre-Made Dough (
Finally, we get to the Robo-advisors which have become very popular over the past decade. Companies like Betterment and Wealthfront opened the door but now most large financial firms have a
|Institution||Expense Ratios||Add’l Fee||Fee with Advisor|
|Vanguard Personal Advisor||0.05%||—||0.3%|
The one benefit that I have seen with
There you have it! 3 different ways to set up your 1st portfolio with a little primer on asset allocation and modern portfolio theory. Now don’t think you have to only pick one of the 3 options. Personally, I utilize all three at the same time with TDFs in my 401K, Robo-advisors for my taxable accounts, and DIY for my Roth IRA. You can start tweaking as you get more experience with investing and feel comfortable with different asset classes.
I hope this helps you get started!