One Size Doesn't Fit All: How To Create A Personal Investment Portfolio

Where you invest your money depends on your goals. Chances are, nobody else has the same particular goals as you do. So why should you have the exact same investment portfolio as somebody else?

While an increasing number of roboadvisors make it easier than ever to invest, such simplified investing is only possible because you’re getting the same portfolio as thousands of other investors.

And if you’re not yet in a position to hire a financial advisor to customize your portfolio, confidently picking the right investments yourself is a daunting task.

DRAFT is an app that may help you with this goal. DRAFT can help you analyze your portfolio, make informed investment decisions, reduce fees, and even compare your holdings to the top 10 percent of investors.

Unique goals need unique portfolios

Why do you invest? For financial security when you’re retired? To buy a home? To achieve financial independence at an early age and live off your savings? Consider these factors:

Timeframe

When will you need your money? Not for decades? In 10 years or so? In less than five years?

How soon you need your money should be a driving force in creating the ideal portfolio. If you need your money in less than five years, it’s my opinion that you should keep it in a boring old savings account. Yes, you might miss out on higher returns over the five years. But with such a short time frame, the important question to ask yourself is: Will my money be there when I need it?

Even the savviest investors can lose big time if they absolutely have to liquidate their money in a bear market.

As you expand your investing horizon to 10, 20, or 30 or more years, suddenly you have more options. Investing heavily in stocks now makes sense because your return will be the average of good and bad markets over decades.

Savings rate

How much are you saving? Do you need to chase a higher return to make up for a lower savings rate?

If you can sock away a large percentage of your income, you may be happier with more conservative investments. Which brings us to:

Risk tolerance

How’s your stomach for risk? Are you willing to tolerate short-term market swings of up to 30 percent if it means a chance at a more competitive long-term return? Do you distrust stocks?

Social values

When you invest your money, where do you want it to go? Is it important to you to avoid socially or environmentally harmful industries? Do you want to proactively invest in technologies that could make the world a better place?

Hands-on vs hands-off

How actively do you want to manage your investments? Do you enjoy reading financial books and magazines and adjusting your portfolio regularly? Or would you prefer a set-it-and-forget it approach in which you might only review and rebalance your holdings once a year?

These questions illustrate what I mean by “different goals.” Even if you and a friend are both 35 and hoping to be financially independent by age 50, you will have different investing needs based upon other variables like savings rate, risk tolerance, and how much you anticipate withdrawing in the future.

Related: Index Funds Vs Target Date Funds: How To Decide Which Is Right For You

Tailoring your portfolio to your goals

In investing, you want to learn from experts and the experience of others but make your own decisions.

A sample portfolio that you get from a book, blog, or app like DRAFT can give you a starting point.

For example, a very simple portfolio for a risk-tolerant investor with a long horizon (20 or more years) is 80 percent stocks and 20 percent bonds. Simple index funds like Vanguard’s Total Stock Market Index and Total Bond Market Index (exchange-traded or mutual funds) provide a foolproof and low-cost way to get started in just two investments.

From there, it’s time to review, tailor, and optimize your portfolio.

One pro and con to the Vanguard funds I mention above is that they invest you in everything but the kitchen sink. That provides total diversification and may be fine for the set-it-and-forget-it set, but more involved (or more aggressive) investors either won’t want to be invested in everything or will want to be invested more heavily in certain areas that have a potential for growth or are most aligned with their values.

This is where a tool like DRAFT becomes quite useful.

For free, DRAFT offers a big picture of your portfolio by aggregating all of your investments into one dashboard that illustrates your returns, expense ratio, asset allocation, and investing style (conservative, moderate or aggressive).

DRAFT also compares your portfolio to the best portfolios in its database so you can spot opportunities to improve. (DRAFT is coming in a public beta this fall; click here to join the waiting list.)

DRAFT analyzes your portfolio and provides a blueprint of suggested changes to help you become a better investor.

The first steps to improving your portfolio

Clearly, this post just scratches the surface of portfolio design. But let’s close with some specific steps you can take to ensure you have a one-of-a-kind portfolio that’s aligned with your one-of-a-kind goals.

1. Cut expenses.

Unless you have a specific reason for owning a mutual fund or other investment that charges 1.0 percent or more per year in expenses, you can find cheaper alternatives. Some index funds have expense ratios of 0.20 percent or less, and even if you want to stay with actively-managed funds, you can usually find a good one with expenses under 1.0 percent.

2. Look at your mix of domestic and foreign investments.

A common mistake among new investors is to overlook investment opportunities abroad. For example, investing in an S&P 500 index fund is not the worst move a new investor could make. But that index only holds U.S.-based companies. Compared to much of the world, the United States economy is developed. That makes it more stable, but it also means that there are opportunities for more explosive growth overseas. For this reason, funds holding foreign stocks deserve a place in most young investors’ portfolios.

3. Try something different with 5 to 10 percent of your portfolio.

Diligent long-term investing can be boring. But I think it’s fine to set aside some of your money for experiments (that is, nontraditional or slightly riskier investments). This could mean investing in a particular stock in which you see long-term potential or becoming an investor in peer-to-peer loans. Be sensible; I’m not suggesting you try to day trade penny stocks, but adding a little bit of color to your portfolio might pay off.

Summary

The investments you hold should reflect your individual goals:

• When you need the money
• How much you can save before then
• Your tolerance for risk
• Your social values
• How hands-on you want to be when managing your money

Because no two investors have the same investing goals, no two investors should have the same portfolios either. A tool like DRAFT can help you analyze your investments and compare your portfolio to top performers.

To create your one-of-a-kind portfolio, consider:

• Reviewing your overall asset allocation
• Cutting expenses
• Adding foreign investments
• Investing a small percentage of your money in a desirable company or alternative investment

Get DRAFT: Join The Wait List For The DRAFT Public Beta This Fall

What do you think? What investments have you made to customize your portfolio to your goals and values? Let us know in a comment.