You hear it all the time, you need an investment portfolio if you want to retire or even better retire early happily. Much easier said than done, as we’re faced with countless investment choices and going through each investment is extremely difficult. Whether if we’re talking about mutual funds, stocks, bonds, insurance, foreign exchange (Forex), or real estate, the choices that we face as investors makes creating the “ultimate” investment portfolio a very daunting task.
The great news is we have access to a ton of information.
The bad news is we have access to too much information.
It’s easy just to give up, stick all your money into a 401k (or whatever that is equivalent in your country, ex. RRSPs in Canada) ask a banker or Investment Manager to take care of everything and talk to you once or twice a year and pay your fees. But even if this is the route you want to take, it’s important to have an idea what all the mumbo jumbo it is that he or she is talking about as you go through the exercises of determining your risk tolerance, talking about asset allocations, and the liquidity of your portfolio. Have I lost you yet? Don’t worry keep reading and all this will be easier to understand!
I’ll be repeating some stuff from the blueprint to financial freedom but it’s well worth repeating and if you haven’t read it yet, then you should!
Your “Magic” Number to Financial Freedom
You should at this point know what your “magic” number is to reach financial freedom. If you don’t spend some time coming up with it! Sure it might change over time, but having a number is better than no number.
From determining your magic number, you know that you have a set yield that you want from your portfolio. Now the easiest way to calculate this is to focus on financial investments so a lot of the numbers will be focused on these investments like savings accounts, GICs, bonds, and stocks. Real estate can also be added to this mix but there are more factors that you need to consider with real estate, which I’ll get into as well.
For me, the Investment portfolio is the fun stuff. There’s a lot to cover so let’s get started! This isn’t an exhaustive list and I’ll likely add more as I think of what is necessary. It’s tough because too much information can make it more complicated, having said that what needs to be covered, needs to be covered.
1) What is your risk tolerance?
– 6 levels: Secure, Very Conservative, Conservative, Balanced, Aggressive, and Very Aggressive
– With great risk comes great reward, or does it?
– How comfortable are you with locking your funds away?
2) Think about the different parts of your overall portfolio
– Assets come in different shapes, sizes, and forms. This portion will
– Cash (Rainy day), Retirement, Short to Midterm
– Children’s education
– What to expect from your portfolio
– Rainy day 3-6 months
– Retirement, think about what a realistic date for retirement is
3) Creating a Consistent Investment Plan
– Regular investments
– Automatic contributions
– Minimum investments
4) Pick an Investment Platform and lower costs as much as possible
– Discount brokerage
– How much mutual funds are actually costing
5) Always consider taxes
– Tax efficient investing
– Take advantage of all government incentives
– Asset Allocation
– Dissecting mutual funds to see how you could do something similar on your own
– What it is in and how to go about doing it
– How much diversification is enough?
7) Different Asset Classes
– Cash Equivalents
– Mutual Funds
– Real Estate
– Gold, silver, etc.
8) Don’t get caught up in the details
a. Forget fads, forget analysts, stay focused on your plan
9) Rebalancing as necessary
– Tactical Asset Allocation
– There’s a reason why Investment Managers get paid on a regular basis, this stuff takes work and if a portfolio manager could buy a stock portfolio and leave it forever, he or she wouldn’t make the returns that he should or charge the money he or she does
Those are some of the essentials to planning, building and reviewing your personal investment portfolio. It actually takes a lot of work believe it or not and that’s why most people just go the route of hiring a professional. But there are several benefits of doing all this on your own. The major benefit of doing it yourself are the fees or commissions that you’ll save if you can construct your own portfolio. If you pay your financial advisor or investment manager 1-2% a year (possibly more) that’s 1-2% that’s compounded against you as you could have reinvested that money straight back into your investment portfolio. I’ll go into more detail in the article “Why you should avoid mutual funds if possible”
Please be sure to consult a financial professional before making any decisions. All information on Freedom Nova is for informational purposes only and is not be confused with financial advice.