A beginner's guide to building an investment portfolio (2024)

Money is a tool that, if used wisely, can help you meet your needs and enjoy life to the fullest. Choosing the right investment portfolio is an important step toward that end.

An investment portfolio is your particular mix of assets and usually includes stocks, bonds and other securities. Your portfolio and its asset allocation affect your investment returns, though the returns aren't the primary purpose of a portfolio. Your money should work to support your goals, so your portfolio works best when it's designed to help you achieve them, not just chase returns.

Read on to learn more about portfolio components and how to invest in a way that supports your desired outcomes.

What is an investment portfolio?

Your investment portfolio is your investments viewed together as a whole rather than individual parts. Broadly speaking, your portfolio is every investment asset including cash, stocks, bonds, mutual funds and exchange-traded funds (ETFs) you hold in your retirement and brokerage accounts.

Here's a closer look at each of those components:

Cash

You may not think of the cash you have on hand or hold in deposit and transactional accounts as an investment, but it can be an important part of your portfolio. It gives you the stability and liquidity to meet your immediate and short-term financial needs.

You may keep your cash in a number of accounts or vehicles including:

  • Savings accounts
  • Checking accounts
  • High-yield savings accounts
  • Money market accounts.

Depending on how much liquidity you need, short term bonds or CDs also may be appropriate.

Stocks

Stocks represent fractional ownership in the company that issued them. Depending on the type, you may be entitled to a portion of the company's profits, which may be paid to you as a dividend. The stock's price may increase or decrease in the stock market, potentially resulting in a gain or a loss for you depending on your sale price compared to your purchase price. Stocks can be more volatile than other investments, but the returns typically have been higher over time.

Bonds

Bonds are debt securities that represent loans made to the issuer. If you hold a bond, you receive interest payments until the principal balance is returned at the end of the bond term. Interest payments are more stable than the dividends and price appreciation you may receive on stocks, but they're likely lower over long time horizons.

Mutual funds & exchange-traded funds (ETFs)

Mutual funds and ETFs make investment selection simple and more hands-off for you. You buy into the fund's multi-asset strategy rather than purchasing individual stocks or bonds. Your money is invested along with money from other fund participants according to the fund's objectives without you directly managing it. Your gains and losses are based on the fund's overall performance.

What to consider before assembling an investment portfolio

Reflect on what you want your money to do for you before you decide how to invest it. Simply growing your money is rarely the ultimate purpose of investing—if it were, every investor might choose the most aggressive allocations. There's more to it than that.

Before choosing your portfolio investments and allocations, it's important to do some prep work. Also, keep in mind that choosing an investment portfolio isn't a set-it-and-forget-it activity. You need to monitor your portfolio and occasionally review your objectives to make sure your investments continue working for you. Things to consider as you get started:

Choose your investment objectives

Just like you need to identify a destination before planning a route, you need to know the target for your investments. For example, you may want the ability to withdraw $5,000 per month from your savings when you retire, or you may want to save up enough to pay for your grandkid's college.

Place your goals on a timeline

This is called your time horizon. The longer your horizon is, the more aggressive your portfolio can be. If you need the money soon, you may want a more conservative and stable portfolio.

Estimate your risk tolerance

Some investors are comfortable with the chance of large drops in their portfolio as long as they have time to recover and earn higher returns over time. Other investors may not be willing to take that chance. Your portfolio choice impacts how volatile your account's value is, so know your risk tolerance and select a portfolio that fits you.

Yourrisk tolerance may shift over time, and that's OK; just make sure you adjust your portfolio with it. You also may need to adjust your target portfolio mix as your preferences and goals change. An aggressive portfolio may work well when you're decades away from retirement. But this portfolio could be too volatile to depend on when you're about to stop working and need stable savings to draw from.

Keep diversification & allocations in mind

With diversification, you avoid investing too much into any one security, industry or sector. Instead, you choose investments that complement each other. Each of your investments relates to each other in some way. Your portfolio composition and the interaction of the investments are more important than the individual investments you choose.

You'll need to periodically rebalance your portfolio as investment values shift as well. Although you may maintain the same target allocation for a long time, a 60% stock portfolio could easily become a 70% stock portfolio in a strong bull market.

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What is asset allocation & why does it matter?

Asset allocation refers to the mix of the different types of investments, or asset classes, you hold. It's typically viewed as your balance between stocks and bonds. Your asset class mix, rather than the specific stocks and bonds you choose, is a far more important factor in determining future investment performance. The best asset allocation for you depends on your risk tolerance, timeline and objectives.

The description of your asset allocation reflects where it falls in the range between conservative and aggressive investing. It plays a large role in how much market volatility you experience, so it's very important to consider your risk tolerance when selecting an asset allocation.

These are the main categories of asset allocations:

Conservative: Focus on income and stability

Conservative asset allocations tend to have more bonds and cash, often no less than 70%. Portfolios with these allocations also may be referred to as income portfolios because they can be stable and produce consistent interest income. They have very little volatility but also a lower average return than more aggressive portfolios. Investors with very short time horizons or low risk tolerance might choose a conservative portfolio.

Moderate: Maintain slow & steady growth

These asset allocations generally have 40% to 60% invested in stocks. They likely have a higher return and fluctuate more than conservative allocations but not as much as aggressive allocations. The classic retiree portfolio is 60% stocks and 40% bonds and cash.

Aggressive: Take on more risk with the potential for more reward

Aggressive asset allocations have higher stock holdings, typically 70% and higher. The long-term returns can be quite high but also volatile. Investors who are younger, have a higher risk tolerance or have a greater ability to take risks may benefit from an aggressive allocation.

Get help with your investment portfolio

Figuring out the right investment portfolio for you doesn't have to be stressful. Start by reviewing your personal financial goals and a timeline for when you hope to achieve them. Next, reflect on your risk tolerance to determine the amount of volatility you're willing to accept. Putting it all together and selecting an asset allocation that's right for you is the last step before opening an account and investing your money.

Sometimes a little guidance makes a big difference. Thrivent financial advisors can help you land on a financial strategy that's shaped around your particular circumstances. They can talk you through how your investment portfolio fits with your plans and goals.

As an investment enthusiast with a deep understanding of financial markets and portfolio management, let me assure you that navigating the realm of investments is not just about chasing returns; it's a meticulous process that involves strategic planning and thoughtful consideration of various components. The information provided in the article aligns with my expertise, and I can provide additional insights to reinforce your understanding.

Let's delve into the key concepts covered in the article:

Investment Portfolio Components:

1. Cash:

  • Role: Provides stability and liquidity for immediate and short-term financial needs.
  • Examples: Savings accounts, checking accounts, high-yield savings accounts, money market accounts, short-term bonds, and CDs.

2. Stocks:

  • Definition: Represents fractional ownership in a company; potential for dividends and capital appreciation.
  • Characteristics: More volatile than other investments, historically offering higher returns over time.

3. Bonds:

  • Definition: Debt securities representing loans made to the issuer; regular interest payments and return of principal at the end of the bond term.
  • Characteristics: More stable than stocks, with lower returns over long time horizons.

4. Mutual Funds & ETFs:

  • Role: Simplify investment selection, providing a diversified approach without managing individual stocks or bonds.
  • Characteristics: Performance is based on the overall fund's performance, and investors' gains and losses are linked to it.

Considerations Before Assembling an Investment Portfolio:

1. Investment Objectives:

  • Importance: Your investments should align with specific goals, such as retirement income or funding a grandchild's education.

2. Time Horizon:

  • Definition: The expected period until you need to access your invested funds.
  • Impact: Longer horizons allow for a more aggressive portfolio, while short-term goals may require a conservative approach.

3. Risk Tolerance:

  • Definition: Your ability and willingness to endure fluctuations in the value of your investments.
  • Dynamic Nature: Risk tolerance may change over time; periodic portfolio adjustments are advisable.

4. Diversification & Allocations:

  • Significance: Spread investments across various securities, industries, or sectors to mitigate risks.
  • Rebalancing: Periodically adjust the portfolio to maintain the desired asset allocation.

Asset Allocation:

1. Conservative:

  • Focus: Income and stability.
  • Composition: Predominantly bonds and cash (at least 70%).

2. Moderate:

  • Objective: Slow and steady growth.
  • Composition: Typically 40% to 60% invested in stocks.

3. Aggressive:

  • Approach: Higher risk with potential for more reward.
  • Composition: Typically 70% or more invested in stocks.

Conclusion and Getting Help:

Navigating the investment landscape involves aligning your portfolio with personal financial goals, understanding risk tolerance, and selecting an appropriate asset allocation. Remember that market conditions and personal circumstances can evolve, necessitating periodic portfolio reviews and adjustments.

If you find the process overwhelming, seeking guidance from financial advisors, like those at Thrivent, can provide valuable insights tailored to your unique circumstances. Crafting a financial strategy that aligns with your goals is a collaborative effort that can make a significant difference in achieving your desired outcomes.

A beginner's guide to building an investment portfolio (2024)

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