When it comes to investing in the stock market, it can be intimidating to navigate all the options and terminology. In this article, we’ll take a closer look at investment portfolios, which are simply a collection of assets such as stocks, bonds, mutual funds, index funds and exchange-traded funds (ETFs). We’ll cover the basics and define the most common terms and investment practices. Keep reading to learn how to build an investment portfolio that meets your needs, risk tolerance, and future goals.
Diversifying Your Investments: Why It Matters
You’ve probably heard about the importance of diversifying your portfolio. This means spreading out your risk by owning a variety of asset classes. For example, your portfolio could have a mix of stocks, bonds, mutual funds, and ETFs. You can also diversify within each asset class by choosing a mix of small and large companies from different industries.
Generally, having a diversified investment portfolio is a reasonable approach to the steady long-term growth of your finances. Next, let’s look at each asset class so you understand your investment options and how each one could contribute to your overall strategy.
What is a stock?
Stocks represent a certain fraction of ownership in a publicly traded company. When you purchase stock in a company, you get to share in the profits, proportionate to the number of shares you own. This payout is called a dividend.
Stocks are primarily bought and sold on the stock exchange. Historically, stocks tend to outperform other types of investments in the long run. However, stocks can also be the most risky type of asset class. To minimize your risk, you can invest in stocks through an index fund, which are inherently diversified, or partner with a professional investment management team. The riskiest strategy you can take is to try to trade stocks by yourself with no prior professional experience. Investing should be a long-term wealth building strategy, not a way to “get rich quick” or “beat the market.”
What is a Bond?
Bonds represent a unit of corporate debt and are also tradable assets. They are typically known for being a less risky investment because they pay a fixed interest rate. The price of bonds is inversely related to interest rates. When rates fall, bond prices rise and vice-versa.
Mutual funds can be a great option for the everyday investor because they are already diversified. When you invest in a mutual fund, you are investing in an assortment of different securities such as stocks and bonds. This diversification is what makes mutual funds a less risky option than buying individual stocks. You can choose between actively managed mutual funds and passively managed funds, also known as index funds.
Index Funds, also known as Exchange-traded funds (ETFs) are similar to Mutual Funds. The key difference is that index funds and ETFs are not actively managed. Rather, they represent a large group of stocks and you can choose from the various ETFs to find one that matches your investing goals.
For example, you could likely find an ETF that covers a group of tech company stocks or financial company stocks. There are many ETFs that suit different needs and interests, so those are just a few examples.
Why would someone want to go with a passively managed ETF over a Mutual Fund? The main difference is that the cost of management fees tends to be lower for ETFs on average when compared to Mutual Funds.
CDs, Savings Accounts, and Money Market Accounts
As part of your investment portfolio strategy, you should keep some of your money in a more liquid account. Also known as the “immediate bucket,” this is where you keep the next year or two of cash to live off of in retirement. Check out our personal savings account options such as CDs, savings accounts, and Money Market. Any of them would be a safe place to keep your cash bucket while still earning some interest.
Consider Your Risk Tolerance
Now that you have a better understanding of the different types of assets available to help you build your investment portfolio, let’s look at your tolerance for risk. This is an important factor you can use to guide your investment decisions.
Conservative, Moderate, or Aggressive
When assessing your risk tolerance, consider the amount of market risk (stock volatility, market swings, economic and political events, or regulatory and interest rate changes) you can tolerate.
Age, investment goals, income, and comfort level all factor into your risk tolerance. For example, younger investors are encouraged to be more aggressive because they still have a lot of time ahead of them to recover from setbacks. On the other hand, investors who are nearing retirement tend to be more conservative. A moderate risk tolerance means you sit in the middle between conservative and aggressive.
General rules of thumb for each risk tolerance include:
- Aggressive: About 80% stocks and 20% bonds.
- Moderate: About half and half between stocks and bonds.
- Conservative: About 20% in stocks and 80% in bonds.
Our Wealth Management Advisors can help you build your investment portfolio!
Union Bank’s investment management services offer a comprehensive set of investment options and provide you with the personal attention necessary to develop a customized portfolio that simplifies your life and maximizes your future financial potential. There are many new and established investment management companies to choose from. How do you know which firm to trust with the future of your most valuable assets? Union Bank’s long history in the community is the reason our Vermont and New Hampshire clients put their trust in us. Choose the investment advisors that are recognized by the people who live in your community. Contact our team today to discuss your financial hopes and goals!
*Unlike traditional bank deposits, non-deposit investments are not insured by the FDIC; are not deposits or other obligations of Union Bank and are not guaranteed by Union Bank; and are subject to investment risks, including possible loss of the principal invested.