When it comes to investing, our message has long been loud and clear: Build a well-structured portfolio to capture available market returns while managing the risks involved. Shape it to meet your individual goals and risk tolerances. Keep a lid on the costs. Stay on target over time.
That’s all well and good, but …
What if you’ve been investing a while, but you don’t yet have that “well-structured portfolio”?
It stands to reason: The more wealth you accumulate, the more chaotic your assets and accounts can become. What begins as a manageable assortment (hopefully) grows. That’s a good “problem” to have, but the sheer volume can eventually overwhelm your organizational efforts.
Then what?
Fortunately, it’s never too late to bring order to your investment universe. In this first installment in our three-part series, we’ll explore some sensible solutions to this perennial challenge, starting with initial steps you can take to move from random results to a more organized approach.
Clarifying Savings vs. Investing
Before diving into the details, it helps to clarify something that often trips people up: the distinction between saving and investing.
Think of saving as tucking cash under the mattress—or, more wisely, parking it in a readily accessible account like your local credit union’s savings or a high-yield account from Ally or Capital One. The main goal of saving is to keep your money safe and available for near-term needs or unforeseen expenses. There’s little risk, but also minimal reward—your cash tends to grow at a snail’s pace, at best outpacing inflation.
Investing, on the other hand, is about playing the long game. Here, you’re putting your money to work by buying things like stocks, bonds, mutual funds, or real estate with the aim of growing your wealth over time. The trade-off? Investments can rise and fall in value, so you’re taking on risk in exchange for the potential of higher returns—a necessary ingredient for building wealth to fund those big, future goals.
Both saving and investing have their place in a healthy financial life. The trick is knowing when to use each and building a plan that blends them according to your goals, needs, and appetite for risk.
What Are the Main Types of Traditional Investments?
Before you can start organizing your portfolio, it helps to know the foundational building blocks you might be working with. Here’s a quick refresher on the usual suspects:
Stocks:
When you invest in stocks, you’re buying a slice of ownership in a company—think giants like Apple or Coca-Cola, or perhaps a smaller firm you believe in. Your returns come from two primary sources:
Price appreciation (when the share value goes up)
Dividends (a portion of the company’s profits paid out to shareholders)
Stocks can offer impressive growth potential, but they don’t come without growing pains; their prices can move up and down, sometimes dramatically, from day to day.
Bonds:
Bonds, on the other hand, are essentially loans you make to companies or governments. Instead of a share of ownership, you become a creditor, expecting regular interest payments over a set period—and eventually, your money back at maturity.
Less rollercoaster-like than stocks, bonds are typically seen as a steadier, lower-risk option.
Returns tend to be more predictable, though they’re usually on the modest side.
If a company falls on hard times, bondholders are first in line for repayment, edging out shareholders. This helps keep risk in check, but also means lower possible rewards compared to stocks.
Step One: Take Stock of What You’ve Got
A great way to get started is to figure out where you stand today. What do you currently own? Where are you holding it, and why? Bonus points if you can determine how much your current holdings are costing you in apparent and hidden fees.
Step Two: Decide Where You’d Like To Go
Next, it’s time to plan—and document—what your orderly investment universe looks like, and how you expect to get there. Having a plan in place can feel incredibly empowering if your investments have gotten out of hand. You can stop taking pot shots at your wealth, and begin aiming at your tailored targets.
Strategy: How much risk and expected return are you shooting for? Do you have the time and temerity to take on more investment risk, hoping for higher returns? Or are you better served with a more modest approach—less “exciting” but less likely to fall apart in a pinch?
Target: If you could start with a clean slate for creating your “perfect” investment portfolio, what would that look like? How many stocks vs. bonds, international vs. domestic, and so on? What would be the best funds or securities for achieving your aim?
Tactics: Which of your current investments no longer make sense for your plans? Which might be replaced with better-managed, lower-cost equivalents? What pieces are missing?
Step Three: Proceed as Planned
If you’ve accumulated a vast clutter of capital, you’re likely to want to do some remodeling: selling unnecessary or overpriced positions, buying others that are a better fit, streamlining duplicate assets and accounts, and otherwise rearranging your financial furniture.
In a tax-free world, you could proceed at full speed. In real life, when you sell positions for more than you paid for them, there can be burdensome capital gain taxes realized in the year of the sale. Plus, if you generate enough taxable gains in a year, it could bump you into a higher tax bracket, which could increase your tax rates across a wider swath of your total annual income.
How do you pursue a tidy transition, given the challenges involved? We’ll offer some insights on that in our next piece, Transitions and Taxes.
What Are the Basics of Equity Investing for Beginners?
If you’re just dipping your toes into the world of equity investing, you’re essentially considering buying slices of ownership in various companies—think of yourself as acquiring tiny pieces of businesses ranging from Apple to your local supermarket chain. When you own a stock, you own a share in that company’s fortunes, both good and bad.
Before you dive in, here are some foundational elements to keep in mind:
Potential Growth: Stocks can offer attractive long-term growth, as their value may rise alongside the companies’ profits. Not only can you benefit from capital appreciation, but some companies also pay out dividends—periodic payments just for being a shareholder.
Risk and Reward: Along with the potential for gains comes an extra helping of risk. Stock prices can climb (cue celebrations) or tumble (cue nervous glances at your statements), sometimes quickly and without much warning.
Where You Stand in Line: In the event a company faces hard times and liquidates, shareholders are essentially at the back of the claims queue—creditors and bondholders get paid first.
Variety and Diversification: You can invest in individual stocks if you’re up for some research, or you can choose a more diversified approach with funds, such as index funds or ETFs, which bundle together lots of different companies.
Time in the Market: Equity investing works best with patience. Historically, giving your investments years—sometimes decades—to grow and weather the market’s mood swings has been a winning strategy.
Bottom line: Equity investing can be a powerful way to build wealth over time, but it’s crucial to be clear about both the risks and rewards. Take it step by step, keep learning, and don’t be afraid to start small as you build up your confidence and portfolio.