personal finance

5 Detailed Steps to Design an Investment Portfolio for Any Stage in Life

If you have a drawer full of random investments and bank accounts, you may have money, but you don’t have a cohesive retirement plan. Follow these five steps to build yourself a real retirement portfolio.

To meet your long-term goals, you need an investment strategy that you have confidence in and that you can put into practice. Unfortunately, many Americans lack this ability, which means they end up with a collection of investments rather than a coherent approach that will help them achieve their goals.

Without a road map for your portfolio, you won’t get to where you want to be. Saving and investing are necessary to achieve big-picture goals, such as buying a home, sending your child to college and achieving a sustainable retirement income. It’s much easier to achieve those goals with a road map that includes a step-by-step plan that you can easily execute.

The process I recommend to anyone hoping to achieve their financial goals can be outlined in five steps. Follow along below to build your own investment portfolio tailored to your specific needs.

Step #1: Establish Objectives and Timelines

An objective is simply what you hope to achieve by investing. A time horizon is what advisers call the period after which you’ll expect the invested money back — in other words, to reach your goal. A good rule to go by is that a short time horizon is five years or less, a medium time horizon is five to 10 years in the future, and a long-time horizon is more than 10 years away.

Each different investment objective comes with a different time horizon. If the objective is retirement, then your time horizon stretches from the years until retirement through the life expectancy of the younger spouse, if you’re married. Savings objectives for purchases such as home improvements, buying a motor home or vacation home, etc. all have different, much shorter time horizons. The longest time horizon could be for the wealthy investor wanting to leave something for their heirs. That time horizon might be from their own life expectancy until their beneficiaries reach the age at which they’re able to claim the funds.

Regardless of the objective or the time horizon in which you’ll be able to reach it, it’s important to have an updated risk tolerance assessment at all times. A risk tolerance assesses your comfort with potential loss. (Learn more about that by reading 5 Strategies for Managing Your Changing Risk Tolerance.) For example, perhaps you’re OK if the market drops 10% – you won’t get upset. But if it drops by 20% or more, you can’t take it. That clarifies the type of asset allocation you’ll want to carry out in your investment strategy in Step 3.

When it comes to retirement planning and that time horizon, Social Security and tax planning are two critical aspects of planning. Social Security benefits are set on a sliding scale by age with you being able to claim more if you file later. Based on your own life expectancy and that of your spouse, there are sophisticated methods allowing you to maximize the benefits you receive.

As for taxes, an adviser can help you draw up a tax map that illustrates your income tax brackets and your liabilities under current law, anticipated future brackets and the effects that required minimum distributions (RMDs) — which you must take from an IRA after age 72 — can have on your tax position.

Step #2: Analyze External Factors

One vital part of building a goals-based investment portfolio is accounting for those major events and changes that can and do alter your objectives and their time horizons. I’ve already hinted at one of them: changes in tax law.

 Most advisers expect taxes to go up in the future, regardless of which party controls the White House or Congress, because funding Social Security and Medicare is perhaps the most important long-term bipartisan objective. How this will play out over the next decade or two will be in constant flux, as illustrated by former president Trump’s 2017 Tax Cuts and Jobs Act. New tax legislation is also almost certain to impact the rules for investors engaged in wealth transfers.

Politics isn’t everything, of course. How the market performs under certain constraining events will be certain to impact the underlying securities used within any portfolio, including interest rates, sector headwinds and the overall global equity market. Almost exactly a year ago we saw a dramatic example of this effect when the financial chaos caused by the COVID epidemic triggered a rapid slide of equities into a bear market, which lasted about a month. That may not seem that significant, except to people planning to retire that month.

Step #3: Develop a Balanced Allocation Strategy

The right allocation strategy strikes the appropriate balance between growth, income and stability. The information I’ve mentioned above, including risk tolerance and time horizons to your goals, helps you to establish this. The allocation split uses this information from your objectives, timelines and risk tolerances, factoring in external major market conditions to come up with a strategy that suits you as an individual investor.

Asset allocations are typically expressed in percentages. For example, if you’re an investor who has a long-term time horizon and a moderate risk profile, you might hypothetically choose a 60% stocks, 30% bonds and 10% cash allocation.

Step #4: Select the Individual Underlying Securities to Fund the Allocations

Once you’ve set your asset allocation, it’s time to decide how to populate your portfolio. This means you need to select from among the universe of available securities which ones you will actually invest in. Your choices include:

  • Individual stocks
  • Individual bonds
  • Mutual funds
  • Exchange-traded funds

Mutual funds and exchange-traded funds are popular choices that offer immediate diversification potential. To populate your moderate allocation portfolio, for example, you might select 70% of your stock allocation to go into an S&P 500 ETF with 10% each into a broadly based foreign stock ETF, U.S. midcap stocks and U.S. small-cap stocks. Your bond allocation could go into a Lehman Brothers Aggregate Bond ETF, and your cash allocation into a money market account.

Step #5: Buy the Securities and Create the Portfolio

If you’ve done the research and accounting for each of the previous steps, then there is not much else to do except to pull the trigger. That requires some type of online brokerage account at a platform such as Schwab, Vanguard or Fidelity.

You fund the account with your savings and then use whichever online brokerage account to buy your positions according to your asset allocation.

A Final Word

The point of plotting out a step-by-step investment process such as this one is to take a broader view. Although we cannot predict the future, we can see coming headwinds before they are on our doorstep, we can certainly plan for the worst and better planning positions your portfolio for better results.

Investment advisory services are offered through Emerald Blue Advisors, a registered investment adviser offering advisory services in the state of California and jurisdictions where registered or exempted. This communication is not to be directly or indirectly interpreted as a solicitation of investment advisory services to residents of another jurisdiction unless otherwise permitted.
Licensed Insurance Professional. We are an independent financial services firm helping individuals create retirement strategies using a variety of investment and insurance products to custom suit their needs and objectives. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice. 20896 - 2021/3/29
Investing involves risk, including the loss of principal. No Investment strategy can guarantee a profit or protect against loss in a period of declining values. Any references to protection benefits or lifetime income generally refer to fixed insurance products, never securities or investment products. Insurance and annuity products are backed by the financial strength and claims-paying ability of the issuing insurance company.

About the Author

Roberto Trejo, NSSA®, CFF®

Senior Managing Partner, Coeus Financial

Robert Trejo is a Certified Financial Fiduciary®, an Investment Adviser Representative and Senior Managing Partner of Coeus Financial, an independent, full-service wealth management firm.

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