3 Steps to a Perfect Portfolio

Photo (cc) by brian glanz

Editor’s Note: The following post comes from partner site Dough Roller.

Investing in stocks, bonds or mutual funds can seem overwhelming. Particularly if you’ve never invested in the market, choosing between the thousands upon thousands of investment options can make just about anybody wish for the days of company run pension funds. But like it or not, ever since the advent of the 401k and IRA, we’ve all become (or should have become) investors.

The good news is that putting together a sound portfolio is a lot easier than you may think. In fact, you can construct a solid investment strategy in about 10 minutes using the following three steps.

Step 1: Stocks vs. Bonds

Of all the investing decisions you’ll make, deciding how much to invest in stocks and how much to invest in bonds is arguably the most important. The allocation of your investments between stocks and bonds will determine how much risk you are taking (stocks are generally more risky than bonds). It will also determine in large part how much return on your investment you can expect.

As a general rule, the percentage of your investments in stocks should equal 100 minus your age. So if you are 30, this rule of thumb suggests investing 70% of your investments in stocks (100 – 30). Some take a more aggressive approach and suggest 120 minus your age. Whatever approach you take, the idea is that when you are young and have many years before retirement, you can invest more in stocks. As you get older and closer to retirement, more and more of your investments should move from stocks to bonds.

For our purposes, we’ll assume a 30 year old decides to put 70% of his or her investments in stocks, and 30% in bonds:

Stocks: 70%
Bonds: 30%

Step 2: International Stocks vs. Domestic Stocks

The next question concerns how much of your stock investments should go to foreign companies and how much should be invested in U.S. companies. If you ask this question to 10 different investment advisors, you’re likely to get 10 different answers. While opinions vary, many suggest an allocation to foreign companies of about 20% to 40% of the stock portion of your portfolio. We’ll use 40% for our purposes, which gives us the following rough allocation:

U.S. Stocks: 40%
Foreign Stocks: 30%
Bonds: 30%

And that’s it! We still have to execute our plan (see below), but a simple investment plan that should work for most investors can be developed in minutes.

Step 3: Executing Your Plan

Once you decide on your asset allocation plan, it’s easy to implement it. In fact, there are three basic approaches. We’ll start with the easiest approach.

Lifestyle Funds: Lifestyle funds, also called all-in-one funds, are mutual funds that in turn invest in other mutual funds. By picking the right lifestyle fund, you get instant diversification because the fund takes your money and invests a certain percentage in U.S. companies, foreign companies and bonds. And there is a lifestyle fund to fit just about any asset allocation plan.

Examples of lifestyle funds include Vanguard’s Target Retirement Funds and Fidelity’s Freedom Funds.

Individual Mutual Funds: If you’d like to take a more active role, you can pick your own individual mutual funds. Using Morningstar and other online tools, it’s easy to research mutual funds and determine what asset class a fund covers (e.g., U.S., foreign, bonds). If you spend any time reading about asset allocation, you’ll soon encounter the debate over whether a low cost index fund is better than a higher cost actively managed fund. My vote has always been for the low cost index fund, but either approach can work.

If you take this approach, your best bet is to pick a mutual fund company and stick with it. By investing directly with a company like Vanguard (rather than using a broker), you can save a lot of money on trading fees.

Brokerage Accounts: For even more control, you can implement your investment plan through low cost discount brokers. This approach is best if you plan to invest not only in mutual funds, but also ETFs and individual stocks. I take this approach for some of my investments, and the individual mutual fund approach with others. And that underscores an important point–investing is not all or nothing. You can use a combination of approaches if you’d like, so long as your overall investment plan is consistent with your financial goals.

Going to the Next Level

You can make an asset allocation plan a lot more complicated that what’s described above. For example, you can further divide your investments between large and small companies, emerging markets and developed countries, government bonds and high yield issues, and so on. But for most people, it’s just not necessary. Also, recognize that every situation is different. The above portfolio is for a hypothetical 30 year old; it may not be right for you. If you need help constructing and investment plan, seek out a credentialed investment advisor.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
Big-Ticket Things You Should Never Buy
Big-Ticket Things You Should Never Buy

In this week’s podcast: Are you wasting big money on these common purchases?

9 Foods You Should Never Buy Again
9 Foods You Should Never Buy Again

Make the wrong food choices, and you can ruin your health — and possibly shorten your life.

How Baby Boomers Are Earning an Extra $573 a Month
How Baby Boomers Are Earning an Extra $573 a Month

In the gig economy, baby boomers are out-hustling their younger competition. You can cash in, too.

7 Social Security Blunders That Can Ruin Your Retirement
7 Social Security Blunders That Can Ruin Your Retirement

Making even one of these mistakes can sap your retirement income.

16 Affordable Products That Could Save Your Life
16 Affordable Products That Could Save Your Life

You’ll want to order these sometimes surprising products from Amazon ASAP.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
7 Kirkland Signature Items to Avoid at Costco
7 Kirkland Signature Items to Avoid at Costco

Even if it seems you save a bundle buying Costco’s Kirkland Signature brand products, they may not be the bargain they appear to be.

How to Buy Gas At Costco Without a Membership
How to Buy Gas At Costco Without a Membership

The warehouse club often has some of the cheapest gas in town. Here’s how you can get it as a nonmember.

10 Things to Stop Buying If You Want a Clutter-Free Home
10 Things to Stop Buying If You Want a Clutter-Free Home

If you like to keep things simple, avoid these purchases.

A Simple Way to Silence Robocalls Today
A Simple Way to Silence Robocalls Today

A few steps can keep your phone from ringing when a spammer calls.

This Company Makes the Best Tires in America
This Company Makes the Best Tires in America

Driver satisfaction with tires is at an all-time high, but one brand stands out.

If You Find This Thrift Shopping, Buy It
If You Find This Thrift Shopping, Buy It

Vacuums from this brand can last a half-century, if not longer — and they’re hot on the resale market.

This Health Issue Can Hint at Dementia Years in Advance
This Health Issue Can Hint at Dementia Years in Advance

One type of pain is especially associated with cognitive decline.

Can I Switch to Spousal Social Security Benefits When My Ex Dies?
Can I Switch to Spousal Social Security Benefits When My Ex Dies?

Knowing when to claim can help you maximize benefits.

If You Find This Thrift Shopping, Buy It
If You Find This Thrift Shopping, Buy It

This iconic dinnerware is prized for everyday use as well as reselling for profit.

Medicare Will Not Cover These 6 Medical Costs
Medicare Will Not Cover These 6 Medical Costs

Don’t let these health care expenses catch you off guard in retirement.

8 Things You Should Always Buy on Amazon
8 Things You Should Always Buy on Amazon

The giant retailer shines when it comes to these things, from basics to hard-to-find specialty goods.

Beware This Hidden Ingredient in Rotisserie Chicken
Beware This Hidden Ingredient in Rotisserie Chicken

Something foul may lurk in those delicious, ready-to-eat birds.

5 Ways to Get Amazon Prime for Free
5 Ways to Get Amazon Prime for Free

Hesitant to drop $119 a year on an Amazon Prime membership? Here’s how to get it for free.

5 Ways to Fill Your Pantry With Free Food
5 Ways to Fill Your Pantry With Free Food

Anyone can take advantage of these resources.

5 States With the Worst Health Care for Retirees
5 States With the Worst Health Care for Retirees

All of these states are located in the same region of the nation.

6 Reasons You Should Stop Hiding Cash at Home
6 Reasons You Should Stop Hiding Cash at Home

Stashing money around the house is anything but harmless.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

7 Big Purchases You Should Never Make
7 Big Purchases You Should Never Make

Sometimes a big-ticket purchase is nothing more than a big waste of money.

5 Products You Should Never Buy Generic
5 Products You Should Never Buy Generic

Sometimes the brand-name version is clearly superior.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.