Building wealth is a marathon, not a sprint. That’s a concept that the world’s most successful investors understand and apply to their own long-term strategies. You, too, can play the long game and potentially win like the pros do. Your first stock portfolio is where you’ll start.
Successfully creating and maintaining your first stock portfolio doesn’t require years of experience or expertise in finance. An uncomplicated approach can allow new investors to confidently build a portfolio that meets their objectives.
Start Early, but Don’t Rush It
First things first: Always consult with a licensed and registered financial advisor/planner before making major financial decisions. It’s much better to allow an expert to guide you than to try to navigate the complex waters of finance on your own. For tax-related matters (such as choosing between a traditional and Roth 401(k)), please be sure to consult with a licensed and registered tax expert.
There are steps you can take to maximize the potential of your first portfolio. The first step is to start as early as possible.
There’s an old saying in the investment business: “Focus on time in the markets, not timing the markets.” Instead of waiting years for the “perfect” time to put together your first stock portfolio and start investing, it’s better to get started sooner. You don’t want to lose your most valuable commodity in the markets: time.
Success in portfolio investing usually means staying invested for years or even decades, and new investors often miss out on the potential returns by hesitating in a quest to time their entry perfectly.
If you start in your 20s or 30s, you will leverage your time advantage. The prices of investable have consistently gone up over the years. Still, don’t hesitate to get started in your 40s, 50s, or even later, as wealth building can be a worthwhile pursuit at practically any stage of life.
Make Friends with Funds
You may have heard stories about folks making fabulous gains from picking out individual assets, such as stocks or cryptocurrencies. However, the reality is that stock picking involves risks and for most investors, it is going to be a losing proposition. Most people, especially if they’re putting together their first portfolio, don’t have the time or the experience for a detailed evaluation of stocks. These investors are better off sticking to funds.
A 401(k) or similarly structured plan will sometimes allow you to pick and choose between funds, such as mutual funds and exchange-traded funds (ETFs). A fund is essentially a basket of stocks with a common theme or characteristic.
What makes fund investing ideal for a first portfolio is that funds relieve you of the need to engage in risky stock picking, while often providing instant diversification.
For example, a fund that tracks (follows the performance of) the S&P 500 would provide exposure to 500 different large companies from a variety of market sectors. Other funds might track the Dow Jones Industrial Average (which follows 30 giant companies), the NASDAQ 100 (which tracks a selection of large companies that often focus on technology), and other indexes.
While the funds themselves will provide a measure of diversification, you might have an opportunity in your 401(k), IRA, or other plans to diversify across multiple funds. Thus, you won’t have to put all of your eggs in one basket and hope that a single fund performs well. The idea is to identify funds that include different assets and don’t overlap too much.
For example: Mutual funds that track the S&P 500 and the NASDAQ 100 are likely to have some stocks in common, but they’re different enough to potentially justify owning some of both.
You might also have the option to include bonds and/or funds that track the performance of bonds in your portfolio.
It makes sense to avoid high-yield bonds in your first portfolio, as they tend to be high-risk, and instead focus on government-backed bonds with lower but more reliable yields. A moderate government-bond allocation can add some stability to your portfolio when stocks and other assets are volatile, such as during an economic recession.
The old, time-tested formula is a 60% allocation in stocks (or better yet, funds that include stocks) and a 40% allocation in bonds. However, this mix might not suit your individual needs, so feel free to adjust.
Your asset allocation will depend on several factors, such as your risk profile and your time horizon for your investments. Learn more about asset allocation or take our risk profile test to discover the investing style that best suits you.
More Isn’t Necessarily Better
By now, you might be motivated to hit the ground running and start putting together your first portfolio. That’s great, but haste won’t produce better results. Research, not investment, is the first step of the portfolio-building process. That way, you’ll be able to apply the time-tested principle of “know what you own.”
Don’t feel the need to be overly aggressive with your first portfolio allocations. Funds that promise sky-high returns are often fraught with excessive risk. Remember the principle that if it seems too good to be true, it probably is. Again, this process is best treated as a marathon and not a sprint. Strong returns tend to result from applying the “time in the markets” concept to a diversified mix of multiple, moderately sized portfolio allocations.
It’s About Time, Not Attention
Obsessing over your portfolio isn’t necessarily going to translate to better long-term returns. It’s fine to continue to conduct research after you’ve put together your first portfolio. However, if you’re in it for the long run, then there’s no need to constantly check your portfolio’s performance.
If you’re prone to obsessing over your portfolio’s day-to-day ups and downs, then it might be a good idea to establish a set-it-and-forget-it portfolio. In many cases, 401(k) and similar plans will allow you to set up autopilot settings, so that you can make regularly scheduled, automated contributions and get performance reports/statements on a monthly or other infrequent bases.
Finally, the “more isn’t necessarily better” concept definitely applies to fees. Don’t make this your sole criterion for asset selection, but funds with lower fees are often preferable to higher-fee funds. Higher fees might not take a big chunk out of your returns at first, but over the years, they can add up and take a toll on your portfolio’s performance.
If you’re like most investors, your first stock portfolio will be a diversified collection of mutual funds and ETFs. There’s a good reason for that. It’s a simple, effective way to participate in the markets without putting in a huge amount of time or taking on excessive risks.
Some investors decide to allocate a percentage of their portfolio to stock-picking and more active trading as they gain experience. Others don’t, and there’s really no need to. Stock-picking requires a great deal of time – which is a cost that you need to consider – and the stark statistical fact is that most stock pickers underperform the market.
If you follow investment discussions online, you’ll see that there’s a hierarchy. Aggressive stock pickers and options traders often present themselves as the elite: sophisticated, knowledgeable, and professional. It’s natural to want to join that elite and be one of the insiders, but be wary of that impulse. There’s absolutely nothing wrong with sticking to your first stock portfolio or something much like it.
If you have the time and expertise and you want to try stock picking, there’s nothing wrong with that, especially if you’re conservative and work with only a portion of your assets.
If you overstep your skills or get too ambitious you could face serious losses.
The Bottom Line
These not-so-complicated but essential steps can help you to build a first stock portfolio that’s properly vetted and diversified with a reasonable balance between risk and reward. Don’t expect perfection on your first try and feel free to occasionally adjust your portfolio as needed. You’ll have the best chance of enjoying wealth-building portfolio power over time.
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