Building a Better Portfolio
An excellent guest post today from fellow blogger and investment analyst Joseph Hogue, CFA. Enjoy! – Kurt
How to Build a Better Portfolio that Meets Your Needs
Don’t neglect the opportunities outside of stocks to build a better portfolio and protect your wealth against the market roller-coaster.
One of Kurt’s earlier posts on Money Counselor this year hit me as an important lesson that needs repeating every couple of years. It’s a lesson that few investors remember for very long but one that could save your nest egg and keep you from living on government assistance in retirement.
Kurt wrote about a hypothetical investor, Lucy, a recent retiree portfolio invested almost entirely in stocks. Lucy gets caught in a stock market crash and sees much of her savings wiped out.
Her financial advisor tells her to wait it out and reasons that the stock market has always rebounded in the past.
The advice doesn’t help Lucy who is panicking about how to pay her bills. She watches her much smaller nest egg get spent down quickly and worries that she won’t have enough.
It’s a too familiar scenario, especially for that had retirement plans for the period from 2007 to 2009, and the reason Kurt suggests that stocks are too risky for retirement.
The problem is that most financial advice comes from the perspective that investors need to ‘beat’ the market. That’s how advisors rationalize their fees, on the idea that they can help you make outsized returns in stocks.
The truth is that you investing goal should be something completely different and it will affect how you pick investments.
Stop Investing to Beat the Market
Let me ask you a question. Which is more important, whether you beat the market return or whether you beat your investing goals?
We’re not assuming here that IF you beat the market you will beat your investing goals. It’s a dangerous assumption and leads too many investors to chase risky investments.
Understanding that beating your own investing goals and enabling that retirement of your dreams will change your investing strategy entirely…and for the better.
This all starts with an idea of the rate of return you need to meet your investing goals. That’s a completely separate post altogether, in fact it’s a big part of Kurt’s simple guide to Build Wealth Without Stocks.
A funny thing happens for most investors when they figure out the return they need to meet their goals, it’s way under the average return on stocks.
Knowing that you don’t need to juice your portfolio with stocks to meet your investing goals frees you to invest in other assets, less risky assets and not worry about whether you’ll meet your goals.
How to Build a Better Retirement Portfolio
That doesn’t mean you shouldn’t invest in stocks. I have 60% of my portfolio in stocks as I turn 40 next month. Even Kurt in his late 50s still holds 15% of his portfolio in stocks. (See my post earlier this week to learn how most of that 15% is invested! – Kurt)
But as you approach retirement, start investing more of your money in other assets like bonds and real estate. This shift should start in your 40s but should absolutely have started by your mid-50s if you plan on retiring around 65 years of age.
The problem is that buying real estate brings with it management headaches that most investors just don’t need. The amount you would need to invest to diversify across property types and different locations is also out of reach for most.
Bonds are also difficult to invest in directly because of high broker fees on small investments and the amount needed for a large, diversified portfolio.
That’s where exchange traded funds (ETFs) come in and one of my favorite investing tools.
I started using Motif Investing earlier this year as a way to save money. The website lets you group up to 30 stocks and ETFs together and then buy them all with just one trading fee.
I found another use for Motif after I started using the site and now it’s one of my favorite ways to find investments and build my portfolio.
The groups of stocks created by other investors are all available to view. That’s more than 12,000 portfolios you can sort by category and investing theme. The 10+ categories include retirement, bonds and real estate.
Sorting through some of the funds created offers some great ideas on ETFs that hold bonds and real estate investment trusts (REITs) that provide diversified access to real estate.
Investing in bond ETFs or REITs gives you the opportunity to broad diversification in the two asset classes. Putting them all together into a fund on Motif Investing means you save money by purchasing them all with one trade instead of one for each investment.
Take a closer look at your investing goals and understand you might not need much in stocks, despite what the pundits and advisors may say. Start shifting your nest egg to relatively safer investments in bond ETFs and REITs as you approach retirement and consider using Motif Investing to save money on your portfolio.
Joseph Hogue, CFA is an investment analyst and blogger. He runs six websites on topics including personal finance, how to invest, crowdfunding and making money from home. A veteran of the Marine Corps, he holds the Chartered Financial Analyst (CFA) designation and lives with his family in Medellin, Colombia.