What Goes In Your First Investment Portfolio

Title: What Goes in Your First Investment Portfolio Introduction:

Congrats — if you’re reading this, then it means you’re thinking about investing or are already doing so.  And it’s not a small feat because the fear of investing is a real thing. We may not recognize it, but our relationship with money is, and should be, emotional. Most of us have spent a decent portion of our lives getting a good education in order to get a good job with the hope that we will get a good paycheck at the end of the day.  

But how about the anxiety or paralysis of losing that hard-earned money or conversely, the happiness and satisfaction of knowing your money is working as hard as you to grow? Even for those of us who are fortunate to have inherited wealth, money plays a large role in determining the lifestyle we can afford and can greatly impact our psychological and physical health.  

So how can we make sure we’re doing everything possible to understand, manage and grow our money? While our salaries make up a large portion of our income, they alone can’t help us achieve long-term, sustained financial wellness.  What happens when you are not working because you get sick, need time off to care for kids or aging parents, or simply want to take a sabbatical or retire? 

At Litmus, we believe that investment is one of the pillars of a sound financial strategy. It is an engine that you can accelerate with more aggressive investments when it is appropriate for you to take on risks (e.g., earlier stage of your career) and decelerate with more moderate investments when it is appropriate for you to act more conservatively (e.g., preparing for retirement).  

So first things first,  let’s start with “portfolio” — what the heck does an “investment portfolio” mean?  A portfolio is essentially a collection of things.  For artists, it is a collection of artwork.  For writers, it is a collection of essays or articles.  In finance, a portfolio is a collection of financial assets, such as stocks, bonds, or money market instruments, owned by a particular entity, which can be either an individual (you!) or an institution like your bank, your college’s endowment or your state’s public employee pension fund.

Some may argue that “investments” are distinct from “savings.”  Perhaps, but it largely depends on how you define each term.  We are not didactic but believe that the following could be a useful way to think about it.

• Savings: what you create when you spend less (i.e., your expenses are less) than you earn (i.e. your income, investment earnings, etc.).

  • Savings are intended to be short-term; you will do something with the money — : spend it on a fancy dinner or future vacation or, hopefully, invest it, or better yet, over time, both!

• Investments: what you acquire when you use your savings to buy financial assets (also called financial instruments or financial products) with the expectation that these assets will generate a return to you over time.

  • Think of investments as “deployed” savings.

  • Investments should be longer-term than savings.

• Guess what? When you make investments, you become an “investor.”

What “longer-term” means varies for each investor and could even vary across different types of investments for a given investor. This is also known as the investment timeline or “investment horizon” For example, a 529 plan, a popular investment account specifically used to accumulate money with tax-free investing for qualified education expenses, would typically have an investment horizon of 10-15 years, so the funds can be available when you need to pay for, let’s say, your children’s college tuition.  On the other hand, if you are just starting your career and evaluating your employer’s 401k retirement plan, your investment horizon would probably be closer to 30-40 years.

An investment portfolio is the collection of financial assets that you, the investor, have chosen to own. So what should your “first” investment portfolio look like? That depends on important factors such as the investment horizon and risk tolerance that are specific to you.

However, regardless of where your investment horizon or risk tolerance falls on the spectrum,  you should keep the following in mind when constructing  your first investment portfolio:

1. Clarity of purpose: are you parking cash for 6 months until you use the money to buy an apartment, or are you investing for retirement?

2. Diversification: the old adage of not putting all our eggs in one basket. It is important for your investment portfolio to be diversified across different types of financial assets (e.g., stock, bonds, and money markets) or, at a minimum, across a variety of sectors or issuers (the entities that are offering the financial asset):

   1. E.g. in an all-stock portfolio, consider having broad exposure across various “sectors” such as industrials, consumer, tech/internet, media, energy, etc.

   2. ETFs and Index Mutual Funds are a great way to get this kind of broad exposure with a single investment.

Generally, the longer your investment horizon, the more risk you can potentially take with your choices of investments since you’ll have a longer period to weather downturns and experience upturns.  

Sadly, remember that there is no magic formula and no free lunch. Risk and reward usually go hand in hand; the more risk you are willing or able to take with your investments, the higher your return expectations should be for said investments. Equally, the higher returns you attempt to achieve, the riskier (i.e. more prone to fluctuations in value and more exposed to possible losses) your investment portfolio will be. 

CTA:  To take a deeper dive into concepts like time horizon, risk tolerance, risk vs. return, and investments, sign up for the Litmus Finance 101 Bootcamp.