How to Build a ‘Good Enough’ Investment Portfolio

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Robo-advisors, micro-investing, DIY strategy—or just handing your money over to a financial planner. 

There are many ways to get started investing, but how do you know if you’re doing it right? It can feel incredibly stressful and overwhelming at first, like a simple mistake could derail your entire financial future. 

Now this stress is amplified under the lens of a global pandemic and the coronavirus recession. Even though the markets can (and will) be volatile in a recession, now isn’t the time to panic or remain frozen. In fact, after the Great Recession of 2008, the U.S. stock market went on an unprecedented bull run (that’s jargon for “did really, really well”). 

No matter how deep your investment knowledge goes, don’t worry. You have what it takes to build a “good enough” investment portfolio.

Where You Should Really Start: Goal Setting

The first part of your investing journey has nothing to do with learning complicated language or trying to “pick winners.” It’s both much simpler and a little more daunting: You have to set your financial goals. Your goals provide the bedrock of your investment strategy and inform your choices. 

A few common goals for investing are saving for retirement, a child’s college education, or a down payment on a home or another major purchase.

Each goal comes with its own specific timeline. If you’re saving up for a car and want to buy it within three years, then the time horizon — the time until you want access to your investments — is short-term. It probably would be best to keep that money in a savings account. But if your goal is decades away — like retirement — then you should certainly be investing. 

After determining the “when” (aka time horizon), you also need to figure out “how much.” How much money do you need to use that money for your goal? Do you want $50,000 as a down payment on a house in six years? Do you want $300,000 to put your children through college in 15 years? Do you need $2 million to comfortably retire?

Being specific about the “when” and “how much” helps you figure out how much you need to be investing monthly to reach your goal. It also helps inform your risk level. If you have a longer time horizon, you can take on more risk early on because the market has time to average out if you go through a turbulent time. 

Now, while it’s important to set goals, it’s also important to know they’ll be dynamic and change over time. Starting out with approximates is totally fine because at least you’re getting started

Take a Look at Retirement Accounts

Everyone might be telling you it’s important to put money in the stock market, but guess what? You may already be an investor. Do you have a retirement plan such as a 401(k) or IRA? Is that money actually invested and not just sitting in cash? Congratulations, you’re an investor! 

If you’re unsure whether you’re invested or if your money is sitting in cash, it’s easy to figure out. Log into your 401(k) or IRA portal. If you see “cash/cash investment” or “settlement fund” or “money market fund” then your money is sitting in cash. Money sitting in cash is being “saved” but it’s not growing and compounding the way it can be if it’s invested. You need to be investing for retirement, not just saving. When you invest, money does some of the work for you. Want proof? Play around with this compound interest calculator and compare the result to simply saving your way to retirement. 

Not sure what to pick as investments? There’s a simple solution: target date funds. They’re also called all-in-one funds or lifecycle funds. These are actively managed mutual funds — meaning a human picks out the investments — that are tied to the approximate year you’ll retire (e.g. Target Date Fund 2060). They will start out with more aggressive investments, then become more moderate and eventually more conservative as you inch closer to retirement. 

There are downsides to target date funds. They’re a one-size-fits-all solution that aren’t curated to your specific situation. Because they’re actively managed, they also have higher fees than other options. However, they keep your money from sitting in cash, and you always have the option of changing your investments in the future as you learn more or perhaps hire a professional. 

Leveling Up with an App, Robot, or Human

Perhaps you’ve crafted your goals and are already maxing out your retirement account contributions. Now you’re ready to focus on taxable investing. That’s basically just a fancy way of describing investments in something outside of your retirement account. 

Taxable investing is absolutely part of your overall financial strategy. You likely have goals other than retirement and your money might benefit from being in the stock market rather than sitting in cash. 

There’s an array of options to help you level up your investing game.

Micro-investing

Investing apps have become popular because they offer an incredibly low barrier to entry. There aren’t minimum amount requirements and some have elements of gamification like “rounding up your spare change.” Many investing apps have investors focus on exchange traded funds (ETFs), which allow you to be quickly diversified. 

Diversification is a critical component to building a healthy investment portfolio because it helps reduce your risk. Investing all your money into one company means if that company or that sector of the stock market (e.g. tech, healthcare, transportation) starts to perform poorly, all your invested money is at risk. Investing in many companies across different sectors helps protect your downside. ETFs, mutual funds, and index funds all provide simple, low-cost ways to diversify.

Apps like Acorns, Stash and Robinhood are legitimate options to use, but as always, there is risk with investing — especially if you go with individual stock picking. To make the apps financially worthwhile you have to do more than invest a few bucks a month. Even a cheap fee like $1 a month adds up and eats away your profit if you’re only investing small sums of money. A good rule of thumb is to invest a minimum of $25 per month ($50 is even better) to ensure fees are outweighed by your potential returns.

Robo-advisor

OK, let’s clear something up: robo-advisors aren’t actually robots. And there isn’t a fancy algorithm that can outwit the stock market. In fact, “online financial advisor” is probably a more appropriate term. Plus, plenty of robo-advisors also offer the option of asking a real-life human for help.

But robo-advisors can take some of the pain and confusion out of getting started. You often answer a few questions about your goals, risk tolerance, and financial situation and the service will help you develop an investment plan.

Popular robo-advisor options include Betterment, WealthSimple, WealthFront, and Ellevest. Note: These often come with higher fees compared to investing yourself, either based on a percentage of your account balance (ranging from 0.25% for basic help to 0.40% or 0.50% for more hands-on assistance) or a monthly charge (generally between $1 to $9). But overall, robo-advisors are typically less expensive than hiring a dedicated financial advisor.

Do it yourself

If you’d rather take matters into your own hands, you can DIY your investment portfolio. It’s not too complicated to buy investments yourself using brokerages like Vanguard, Fidelity, Charles Schwab, T. Rowe Price, or Capital Group.

You can also hire someone to help build your portfolio, but be sure to do your due diligence. You’ll want to vet their credentials and ensure they’re a fiduciary. To keep things simple, it’s helpful to work with a fee-only planner who doesn’t earn a commission when selling you financial products. 

One Caveat to Keep in Mind

No matter which route you decide to take, it’s crucial to mind the fees. Even fees that sound fairly low can eat away at your profits and cost you thousands during your investing journey. 

One of the most important fees is the expense ratio. This is the annual fee you usually get charged for a fund or ETF and is often expressed in a percentage. A 1% expense ratio would mean you pay $10 for every $1,000 that’s invested. That is only one example, and you can have an expense ratio that’s a lot lower than one percent. The lower the expense ratio, the better. If you’re working with a human or robo-advisor, you might be charged “assets under management” (AUM). 

Just make sure the quality of service and your returns match up to what you’re paying in fees. 

Bottom Line

Remember that you have plenty of options, but don’t become paralyzed with fear about making the wrong investing pick. You can always change course in the future as you become more informed, amass more wealth, or want additional guidance. 

No matter which path you choose, what matters most is that you’re getting started and building your own wealth.