Investing can be a daunting task for anyone, but it can be even harder to build a portfolio from scratch. Younger investors often have to deal with student debt on top of trying to figure out what stocks to invest in and how to balance any bonds they might have. The following tips will help anyone who is looking to build a financial portfolio.
Target Asset Allocation
Before anyone can start investing, they need to figure out what goals they are working towards. Determining your goals will help determine the right asset allocation. Asset allocation is the mix of stocks, bonds, and other investments you’re adding to your portfolio.
Four factors will influence asset allocation. How much does the goal cost? How long do you have to reach it? How much will be saved towards the goal, and what is the risk tolerance of the goal? If you are saving a more significant amount, you should set up a more aggressive portfolio.
401(k)’s and Employer-Sponsored Plans
Once you’ve figured out how to invest, it’s time to determine where you will build your portfolio. It’s recommended that you max out your retirement account contributions even if your employer doesn’t match the contribution. When deciding your investments for your 401k, it’s important to refer back to your target asset allocation and then to pick one fund that fits each bucket.
If you are looking to keep a simpler portfolio, check to see if your employer-sponsored plan offers target-date funds or asset allocation funds. Target-date funds are mutual funds that adjust over time to become conservative as the investor enters retirement age. This is also the “target-date” of the investment. Just remember, as your goals change, so should your allocation funds!
Individual Investment Accounts
Once you’ve maxed out your 401(k) investments, any additional contributions can be added to an individual investment account. These accounts can be individual retirement accounts (IRAs). A Roth IRA can be a great supplemental account to a 401(k) because the investment earnings grow tax-free.
Non-retirement goals are also crucial when it comes to investing. Setting up accounts that are non-retirement related can help account for other goals you may have throughout your life. Outside of a 401(k), it’s important to make sure that your portfolio is diversified by individual stocks that can offer a lot of value. And just like a 401(k), finding funds that fit into different buckets of asset allocation help build out your portfolio.
If this all still seems very overwhelming and like a task, you are unsure about tackling yourself, partner with a financial advisor to help build out your investment portfolio!