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4 Guidelines for Building Portfolios

Want to do something for your future self? Start investing.


Let’s say you have 20 years to invest, and you’ll earn an average return of 8%. If you start putting $200/month into an investment account now, it could turn into $117,000 in 20 years - and about $70,000 of that is growth!


Investing can seem like magic - as long as you’re diligent about it. That means no buying and selling based on emotion; just choosing an allocation based on your risk tolerance and time horizon, and sticking to it.


I follow a fairly simple framework to build portfolios for myself and the people I work with. Below are the main points I follow, but keep in mind, there are always exceptions to these guidelines.


1. Stay Passive and Keep Costs Low

Active managers (investment managers who actively buy and sell in an attempt to outperform the market) tend to underperform. In any given year, less than half of all active managers beat the market, and over longer timeframes, that number dwindles down to 5-10%. They also tend to charge higher fees because of all that activity, further eroding the investors’ returns. For this reason, I almost exclusively use low-cost index funds to build my portfolios, keeping the expense ratios (the internal fee fund managers charge) of my portfolios below 0.05% in most cases.


2. Diversify, Diversify, Diversify

Typically, taking more risk means you can expect higher returns. Diversification kind of breaks this paradigm. By diversifying, investors can decrease their risk and expect similar or potentially higher returns. In my process, diversifying means investing globally in stocks and bonds. It might also make sense to start adding some alternatives (like real estate, direct lending, and private equity) into the portfolio at some point too.


3. Don’t Forget About Taxes!

For the same reason it’s important to keep expenses low, it’s important to take taxes into account. After all, it’s not about what you make, it’s about what you keep. There are quite a few strategies to limit taxes through portfolio positioning - in fact, enough to fill a whole other post. If you have retirement and non-retirement accounts, you may want to take a look at my post about tax efficiency here.


4. Keep it Simple, Stupid

Simplicity is underrated - especially if you’re managing investments yourself. Limiting your core portfolio to a few funds is usually beneficial. Diversification is important, but that doesn’t mean you need 35 funds in your portfolio. You can get global stock exposure with one or two low-cost funds!

 

As always, keep in mind that you don't have to go it alone. Check out my website to see what it's like to work with me and reach out if you have any questions.


If you found this post helpful, help spread the word! But remember, this is solely for educational purposes - it's not advice.


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