Investment Portfolio: What It Is and How To Start One

Updated February 3, 2023

Illustration of a scale with money weighed against time as represented by a clock.

If you're saving for retirement or a non-retirement goal like a home, you may want to consider investing your money. An investment portfolio that's diversified based on the reason you're investing and your personal ability to withstand risk can help you achieve those goals.

In this article, we discuss what an investment portfolio is and how to start one for yourself in five steps.

Related: 15 Passive Income Opportunities To Help You Earn Extra Money

What is an investment portfolio?

An investment portfolio is a selection of investments, including stocks, mutual funds, bonds and currencies. It could also include real estate or art. Many people choose to manage their portfolios themselves, while others prefer to have a financial adviser or another type of finance professional handle their portfolio.

Related: Financial Planner vs. Financial Adviser: What’s The Difference?

How to start a portfolio

Here are the basic steps that you should take to start a portfolio:

1. Determine your goal for allocating assets

Before you begin building a portfolio you first need to know the reason you're investing. Your goals help you determine what mix of bonds, stocks and other investments that you want to invest in since some types of investments carry greater risks than others.

For example, if you're investing in order to save money for retirement but you're in your 20s, then you could invest more heavily in stocks, as the day-to-day fluctuations will impact you very little over the course of many decades. Conversely, if you're nearing retirement, you should lower the aggressiveness of your investment portfolio, reducing the number of stocks and investing more in bonds.

If you're saving for a short-term goal, where you will need the money in the next five years, you may want to avoid stocks, since they carry more risk. In this situation, you may want to consider a low-risk investment portfolio, online savings account or dash management account.

Related: What is Asset Management? Benefits and How It Works

2. Determine how much you can invest

The next step you should take is to decide how much you want to invest. The amount you invest ultimately depends on your goal for investing and how soon you need to reach it. If you have a 401(k) through your company and they match up to a certain percentage, then it's a good idea to contribute at least that amount so you don't miss out on those funds.

In general, it's typically a good idea to invest between 10% and 15% of your total income for retirement. If you aren't comfortable with that, you may want to start with a smaller percentage and increase it incrementally over time.

If you have other investing goals, other than retirement, you should consider the amount of time that you have to save before you need the funds to be available. You should also consider the amount of money that you need to save to reach your financial goal. After that, you can work backward to determine the amount that you need to invest each week or month to achieve your goals.

Related: What Is a 401(k) and How Does It Work? (With Tips)

3. Open an investment account

Once you determine how much you should invest and how you should allocate your investments, a good next step is to open an investment account. If your company offers a 401(k), it's a good idea to invest in it, even if your company doesn't contribute, because of the tax benefits. If you don't have a 401(k) through your company, you can open your own individual retirement account, such as a traditional or Roth IRA.

If you're investing your money because of a goal other than retirement, then you should consider opening a taxable brokerage account rather than a retirement account. This is a good idea, for example, if you're saving for non-retirement goals like purchasing a home.

There are restrictions for when you can access the money if you're saving the funds for retirement. If you're putting money into a brokerage account, then you can remove the money at any time. It's also important to note that many brokerage accounts don't have a minimum investment required to open an account, which means you can start a portfolio for a very low investment.

Related: 8 Budgeting Methods To Help You Reach Your Financial Goals

4. Understand your options

Next, it's important to understand your different investment options. They include:

  • Stocks: Stocks, also referred to as equities, are known as shares of ownership in a company. Investors buy stocks for the share price, which can range from under $10 to multiple thousand, depending on the company.

  • Bonds: A bond is a type of loan to the government or a company. They agree to pay you back, with interest, within a set number of years. Bonds are considered less risky than stocks because investors know when they will be paid back and how much money they will earn. The drawback is that bonds also earn lower returns long-term.

  • Mutual funds: A mutual fund is a mix of different investments. The benefit of a mutual fund is that investors can avoid picking individual stocks and bonds. This makes selecting a diverse selection of stocks easy and because there is diversification, they're less risky than stocks.

Related: Retirement Checklist: Everything You Need to Know

5. Consider a robo-adviser

If you don't have any prior experience investing your money and building a portfolio, you may want to consider a robo-adviser. A robo-adviser asks simple questions to evaluate your risk tolerance and identify your investment goal. It then invests your money in a diversified portfolio of stocks and bonds. Additionally, it uses algorithms to rebalance your portfolio, optimizing it for taxes. The downside is that robo-advisers do charge a fee that is typically a percentage of your balance.

That said, if you have never invested your money before, you may want to consider using a robo-adviser to feel more confident in your investments. A robo-adviser or another type of digital investing service offers new investors a disciplined approach to investing. If you feel you want someone to talk to about your investment decisions, then you may want to speak with a financial adviser.

Related: How To Set Retirement Goals (Plus Tips and FAQ)

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