financial

The F Word….Finances, Building a Stock Portfolio (Part 4 – 5)

Ahhh…the old stock portfolio, the beautifully packaged symbol of wealth and class that the super rich brag about while sipping wine at extravagant pool parties. You might be thinking to yourself, that’s not me, I don’t have the money to build a stock portfolio, I dont like wine, I live in apartment with no pool!!! What is going on!! Well the truth is you can, yes you my fine readers!! It does not matter what your status is in life, be it a janitor at McDonald’s or the CEO of a Fortune 500 Company, if you follow the steps given below you could have a financial portfolio rivaling any millionaire!!20140216-131646

The first step to building a proper portfolio is to have money (Yeah that one was easy right) but the second step is to use that money. How do you do that, how do you get through all the fees and maintenance costs and trading issues?! Well for a beginner just starting out I have one word: Vanguard.

Vanguard is a massive billion dollar corporation that allows anyone to create and open a brokerage fund, without having to have all of the special licences to trade! While I am not sponsored by them I do use their products and for this blog will exclusively using them as my example (other organizations use the same products I will be discussing but I love Vanguard because they have zero trade cost on a lot of products as long as it is Vanguards) and hope that my readers give them a try!!

Tier 1 – Contribute to the 401 K: I talked about this subject in parts 1 and 2 of this series but it is always important to remind people just how good this is for a diverse portfolio. If you put in 5% and your employer puts in 5% you are basically doubling your money, and that ends up being a lot of kesh!! (That is my favorite way of saying cash btw)

Tier 2 – ETF’s: So you have maxed out or are comfortable with the amount you are putting into your 401 K, now its time to move on to the next tier! ETF stands for Exchange Traded Funds and act in the same capacity as a mutual fund in many ways. They have market shares in a lot of different companies, stocks, and bonds which are then bundled (called baskets) into a package you can then buy. This is great for a starter investor because it allows them to buy into a market instead of only one stock. Vanguard also offers every kind of ETF you can think of, want to take a chance on oil, they have an ETF for that; feeling like information technology might be having a good year? Yep you guessed it, Vanguard has a package for that as well.ETFs

While you wont see big returns on ETF at first they are great long-term (And by long I mean 25+ years) or short-term if you follow my advice. Buying funds for short term reasons is not advice you will often get told but let me explain!! For most of my readers, money is not easy to come by and buying expensive mutual funds isn’t really an option. chats why I suggest buying ETFs as a saving technique. Each month or paycheck, try to buy one ETF. Vanguard does not charge a brokerage fee for ETFs bought through them meaning you can literally buy one at a time and not have to pay a traditional $3-7 brokerage fee!

If you are just starting to build a portfolio, buy ETF in packs of 1-5. Do this so that you have your money in several different markets such as: I.T, international bonds, regular stock market, etc. After you have bought your 5 packs of 5 you are ready to start on the next tier of your incredible portfolio!! (Dont worry, we will come back to your ETFs)

Tier 3 – Index Funds: So now you have in your portfolio a 401 K and a diverse mix of ETF and you are wondering what the next step is, well look no further than the Index Fund!! Index Funds are a huge hit for the wealthy class and Warren Buffet himself has high praise for them. Like mutual funds and ETFs Index funds are stocks that are bought in baskets but are spread through a large range of the market you are investing in.

Most Index Funds have minimum investment prices but there are a few that are $1,000. As this blog is geared to beginners and people saving money I think they are your best route to enter the market at a relatively low price. So, after doing your research you find an Index Fund that you like and you want to purchase it. You have your 5 packs of 5 ETF and yep you guessed it, you are going to sell them to buy your Index Fund. YOU ARE NOT GOING TO SELL ALL OF THEM!!! This is why I suggest buying that amount in the first place, so you can sell a few out of each pack and still have investments in your ETF.giphy (2).gif

So lets say you currently have an asset mix of the following:

  • ETF 1: 5 units worth $70, value $350
  • ETF 2: 5 units worth $55, value $275
  • ETF 3: 5 units worth $65, value $325
  • ETF 4: 5 units worth $120, value $600
  • ETF 5: 5 units worth $90, value $450

Instead of selling all of ETF 4 and 5 you are simply going to sell a mix of them all. So if you bought an Index fund for $1,000 your current portfolio would look something like this:

  • 1 Index Fund, total value of $1,000
  • ETF 1: 3 units worth $70, value $210
  • ETF 2: 3 units worth $55, value $165
  • ETF 3: 3 units worth $65, value $195
  • ETF 4: 2 units worth $120, value $240
  • ETF 5: 2 units worth $90, value $180

The math may not be completely accurate but you get the point! You would then concentrate on filling those ETF back to their original packs of 5 and you are now bragging to your friends about how great retirement is going to be!!

Tier 4: Protecting your assets are just as important as building new ones, especially as you get older. Real estate, regular stocks, and other areas are great to build profits but bonds are great to keep profits. While you are young, investing in risk is easier but as you near your golden years it is important to start switching to a heavier concentration of bonds. However, for new investors and families I still recommend having a few shares of bonds that can help buffer the losses you may see. This is especially important if you get terrified when you see markets drop and want to withdraw your money!! Remember, it takes time to earn money so the longer your investments have to mature the better!!

So if you follow these steps for the next 2 – 3 years your portfolio could look something like this:

  • 401 K Contributions: $3,500
  • ETF 1: 5 worth $70, total $350
  • ETF 2: 5 worth $55, total $275
  • ETF 3: 5 worth $65, total $325
  • ETF 4: 5 worth $120, total $600
  • ETF 5: 5 worth $90, total $450
  • General stocks and bonds: $500
  • Total worth of current portfolio: $6,000

And the numbers will just keep going up!! While I am not a financial consultant I have found as someone who struggled saving from paycheck to paycheck that this system works for me. This portfolio also gives you large exposure to all kinds of markets while also allowing for stop-loss with bond purchases! 553893-breaking-bad-bryan-cranston-heisenberg-meth-money-walter-white-warehouse

So give it a try, build up your own personal portfolio and let your fellow readers know what works best for you. Do you have a better idea to save and invest? What obstacles do you face when investing? Please comment your thoughts and ideas! (Also subscribe, because I am pretty awesome:)

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