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Welcome to the Green Cards To Greenbacks podcast! Today we are talking about one of the most important topics: Investing. You might be wondering: What is an investment portfolio? How can I safely create one that allows me to focus my time elsewhere? What factors should I consider when building an investment portfolio?
In this episode, we will discuss the different types of investments, the benefits of investing through capital markets, how to determine the right amount of risk to take, the common types of investments, and the associated fees. We will also discuss how to choose the right investments for your portfolio to ensure that you are on the path to financial freedom.
Here are the steps you need to follow:
1. Understand what different types of investments are out there.
2. Determine how much risk you are comfortable with taking and how much you should take.
3. Understand the fees associated with different investments.
1. Understand what different types of investments are out there.
Understanding the different types of investments available is the first step in creating a successful investment portfolio. Stocks, bonds, cash, and real estate are common investments.
Stocks are investments that give the owner a share of ownership in a company. Mutual funds are “buckets” that contain numerous securities and offer diversification with the help of a professional manager.
ETFs are a hybrid between stocks and mutual funds, they act like stocks in that they can be traded while the stock market is open, and they work like mutual funds in that they provide diversification.
Bonds are another type of investment; they are loans that investors make to governments and corporations. There is usually a fixed interest rate, a set date when you get your money back, and the returns are generally higher than cash investments.
Real estate investments can be a great way to diversify a portfolio, as they can provide consistent rental income and potential appreciation.
Real estate investments can be accessed through the stock market via Real Estate Investment Trusts, also known as REIT’s.
2. Determine how much risk you are comfortable with taking and how much you should be taking.
When determining an appropriate risk level for your portfolio, the first step is to consider your current situation. If you are a single breadwinner, you may want to keep 12 months of living expenses in cash or bonds. If you are married, 6 months may be a sufficient amount of liquidity. If you are close to retirement or already retired, having two years of living expenses saved in cash or bonds is recommended.
It is important to remember that risk and reward go hand in hand. Taking on more risk can potentially lead to higher returns, but it can also lead to losses. Also, it is important to remember that your risk tolerance can change over time. As you age, your risk tolerance may decline, so it’s important to adjust your portfolio accordingly. Working with a financial advisor can be very helpful in this process as they can review your portfolio and recommend changes as needed.
3. Understand the fees associated with different investments.
The third step in building a successful investment portfolio is understanding the fees associated with different investments. This can include individual stocks, mutual funds, ETFs, bonds, cash, and real estate. Individual stocks usually have a trading fee to buy or sell, but many discount brokerages now offer zero transaction costs. ETFs may have a trading fee and will have an expense ratio. Mutual funds also come with a trading fee and an internal expense ratio, which covers the fund manager, trading, and paperwork.
In addition to the typical fees associated with investments, investors should also be aware of additional fees such as early redemption fees, account maintenance fees, and front-end or back-end loads. Early redemption fees are typically charged when an investor sells a mutual fund within a certain period of time. Some brokerages charge account maintenance fees for keeping an account open. Lastly, front-end or back-end loads are commission fees charged when buying or selling certain mutual funds.
Investors should also remember to factor in the cost of taxes when evaluating investments. Different investments have different tax implications, so it’s important to be aware of them when making decisions.
Building a successful investment portfolio starts with deciding whether to self-manage or hire an expert. If you want to self-manage, companies like Fidelity, Vanguard, and Charles Schwab have a ton of information to help you in that journey.
I would be happy to take you through my free retirement check-up process if you are more inclined to delegate the process to a professional. You can also visit NAPFA.com to research fee-only advisors in your area.
I’d love to hear how you apply the information I provided in this blog to get financial freedom. Leave me a comment on how it went for you, or drop any questions you want me to answer!
