By Jon Warner
Learn more about Jon on NerdWallet’s Ask an Advisor
Building an investment portfolio can be risky and a little intimidating, especially if you’re just starting out. With all the advice and options spinning around out there, it’s easy to get hung up on the “right” way to proceed.
But there are multiple paths to financial success. Which one you ultimately take depends on your investment goals, time horizon and tolerance for risk, as well as the amount of money you want to invest and the amount of time you want to spend managing your investments.
Perhaps the most important thing is just to get started. Here are three ways to begin.
If you’re new to financial services and don’t have much money to invest, a good place to start is with a discount broker. You can trade stocks and invest in ETFs (exchange-traded funds), futures, options, bonds, REITs (real estate investment trusts) and mutual funds. The amount of assets required to set up a discount brokerage account is minimal — about $2,000, depending on the brokerage. You generally pay a fee for each trade you make, though you may get to trade stocks for free for 60 days or get your first 50 trades free.
For an additional cost, the discount broker will provide tools to help you pick stocks and let you trade away to your heart’s content. Discount brokers also have standard mutual fund portfolios for investors not interested in day trading. These portfolios are designed for long-term investing and are similar to an employer’s 401(k) plan. If you have enough assets to invest and are willing to pay more, a discount brokerage will assign you a financial advisor upon request.
If you have $100,000 or more to invest (the amount can vary by firm), a full-service brokerage will take you on as a client and give you a financial advisor to develop a portfolio and a financial strategy. The fees will be higher than with a discount broker, and you’ll also pay commissions on trades. But the service you get will be a step up, and you’ll have access to a wider range of products and financial advice.
The independent route
There is no easy way to go about building a portfolio on your own. I’d suggest taking adult education courses and checking out as many investing books and financial websites as you can. You’ll need to understand common terms such as asset allocation and familiarize yourself with investment analysis concepts such as alpha, beta, standard deviation, correlation, risk and benchmarking. It is a serious endeavor.
In addition, you must be able to establish investment goals for both the short term and long term, gather and analyze all your financial data, understand your family’s needs and determine your risk tolerance.
After assembling a portfolio, you’ll need to monitor it, buy and sell assets for tax advantage whenever possible, and rebalance your portfolio periodically as particular assets gain or lose value.
If you find this totally overwhelming, you can hire a financial advisor to help you out. When searching for a financial advisor, do your homework.
But if you think you’d like to manage your own money, I’d suggest an alternate course of action. You can invest like a pro by buying low-risk, low-cost index funds. These diversified funds simply track stock indexes such as the S&P 500, the Dow Jones industrial average, the Wilshire 5000 and the Russell 2000. Fixed-income index funds, which invest in bonds and generate interest payments, are available, too.
The S&P 500, for example, has posted an average annual return of 11% since 1950. I don’t know of any money manager who can make a similar claim.
Some mutual fund families sell directly to the public, or you could sign up for a no-frills online brokerage account and buy them that way.
Many investment professionals use index funds themselves and believe you cannot beat the market with active account management (that is, by trying to “time” the market). Many do not pick individual stocks. It’s simply too risky.
If you invest on your own, you’ll also save on fees and commissions. It’s common for financial advisors to charge a 1% to 2% annual fee for the assets they manage.
With careful research and due diligence, you, too, can invest like a professional, lowering your costs, diversifying your risks and getting market rate returns.
Image via iStock.