Investment Fundamentals: Building a Balanced Portfolio

Building a Strong Rate of rate-of-return" title="Try our Rate of Return Calculator">Rate of Return)">Return)">Investment Foundation

Successful Time Value of Money Calculator">Present Value rate" title="Try our Effective Interest Rate Calculator">Interest Factor of Future Value of Annuity Calculator">Annuity)">investing isn't about picking the next hot stock or timing the market perfectly. It's about understanding fundamental principles, maintaining discipline, and building a diversified alpha" title="Try our Alpha Calculator (alpha" title="Try our Jensen's Alpha Calculator">Jensen's Alpha)">portfolio aligned with your goals and percentage-return" title="Try our Percentage Return Calculator">Loss Given Default)">risk tolerance.

Asset Allocation: The Foundation of Your alpha" title="Try our Alpha Calculator (alpha" title="Try our Jensen's Alpha Calculator">Jensen's Alpha)">Portfolio

Asset allocation—how you divide your investments among different asset classes—is the single most important factor determining your alpha" title="Try our Alpha Calculator (alpha" title="Try our Jensen's Alpha Calculator">Jensen's Alpha)">portfolio's percentage-return" title="Try our Percentage Return Calculator">Loss Given Default)">risk and rate-of-return" title="Try our Rate of Return Calculator">Rate of Return)">return. Studies show that asset allocation explains over 90% of alpha" title="Try our Alpha Calculator (alpha" title="Try our Jensen's Alpha Calculator">Jensen's Alpha)">portfolio rate-of-return" title="Try our Rate of Return Calculator">Rate of Return)">return variability.

Major Asset Classes

price-to-earnings-ratio" title="Try our Price to Earnings Ratio Calculator">Stocks (Equities)

Expected rate-of-return" title="Try our Rate of Return Calculator">Rate of Return)">Return: 10% annually over the long term
percentage-return" title="Try our Percentage Return Calculator">Loss Given Default)">Risk: High volatility, potential for significant losses in short term
Best For: Long-term Time Value of Money Calculator">Present Value of Growth Opportunities)">growth, investors with 10+ year time horizons
Sub-categories: Large-cap, mid-cap, small-cap, domestic, international, emerging markets

percentage-return" title="Try our Percentage Return Calculator">Loss Given Default)">Bonds (Fixed Income)

Expected rate-of-return" title="Try our Rate of Return Calculator">Rate of Return)">Return: 4-6% annually depending on type
percentage-return" title="Try our Percentage Return Calculator">Loss Given Default)">Risk: Lower volatility, but subject to Rate)">rate" title="Try our Effective Interest Rate Calculator">interest rate and credit percentage-return" title="Try our Percentage Return Calculator">Loss Given Default)">risk
Best For: Income generation, cobb-douglas-production-function" title="Try our Cobb-Douglas Production Function">capital preservation, alpha" title="Try our Alpha Calculator (alpha" title="Try our Jensen's Alpha Calculator">Jensen's Alpha)">portfolio stability
Sub-categories: Government percentage-return" title="Try our Percentage Return Calculator">Loss Given Default)">bonds, corporate percentage-return" title="Try our Percentage Return Calculator">Loss Given Default)">bonds, municipal percentage-return" title="Try our Percentage Return Calculator">Loss Given Default)">bonds, high-yield percentage-return" title="Try our Percentage Return Calculator">Loss Given Default)">bonds

Cash and Cash Equivalents

Expected rate-of-return" title="Try our Rate of Return Calculator">Rate of Return)">Return: 4-5% in current environment (varies with rate" title="Try our Effective Interest Rate Calculator">interest rates)
percentage-return" title="Try our Percentage Return Calculator">Loss Given Default)">Risk: Very low, but rate-of-return" title="Try our Real rate-of-return" title="Try our Rate of Return Calculator">Rate of Return Calculator">inflation percentage-return" title="Try our Percentage Return Calculator">Loss Given Default)">risk
Best For: Emergency funds, short-term needs, opportunity fund
Examples: High-yield savings accounts, money market funds, T-bills

Alternative Investments

Examples: vat" title="Try our Realtor Commission Calculator with VAT">commission-calculator-with-vat" title="Try our Realtor vat" title="Try our Realtor Commission Calculator with VAT">Commission Calculator with VAT">Real estate, futures-contracts" title="Try our Futures Contracts Calculator">commodities, private Time Value of Money Calculator">Present Value of Growth Opportunities)">equity, cryptocurrencies
Consideration: Generally more complex, less liquid, higher vat" title="Try our Realtor Commission Calculator with VAT">commission" title="Try our True Cost of vat" title="Try our Realtor Commission Calculator with VAT">commission-calculator-with-vat" title="Try our Realtor vat" title="Try our Realtor Commission Calculator with VAT">Commission Calculator with VAT">Real Estate vat" title="Try our Realtor Commission Calculator with VAT">Commission Calculator">fees
Allocation: Typically 5-15% for sophisticated investors

Age-Based Asset Allocation Rules

Traditional Rule of Thumb

A common guideline: Stock allocation = 110 - Your Age

Age 30: 80% price-to-earnings-ratio" title="Try our Price to Earnings Ratio Calculator">stocks, 20% percentage-return" title="Try our Percentage Return Calculator">Loss Given Default)">bonds
Age 50: 60% price-to-earnings-ratio" title="Try our Price to Earnings Ratio Calculator">stocks, 40% percentage-return" title="Try our Percentage Return Calculator">Loss Given Default)">bonds
Age 70: 40% price-to-earnings-ratio" title="Try our Price to Earnings Ratio Calculator">stocks, 60% percentage-return" title="Try our Percentage Return Calculator">Loss Given Default)">bonds

Modern Considerations

With longer life expectancies and low rate" title="Try our Effective Interest Rate Calculator">interest rates, many experts recommend more aggressive allocations:

Stock allocation = 120 - Your Age (or even 130 for aggressive investors)
Age 40: 80% price-to-earnings-ratio" title="Try our Price to Earnings Ratio Calculator">stocks, 20% percentage-return" title="Try our Percentage Return Calculator">Loss Given Default)">bonds
Retirees maintaining 50-60% in price-to-earnings-ratio" title="Try our Price to Earnings Ratio Calculator">stocks for Time Value of Money Calculator">Present Value of Growth Opportunities)">growth

Diversification: Don't Put All Your Eggs in One Basket

Diversification reduces percentage-return" title="Try our Percentage Return Calculator">Loss Given Default)">risk by spreading investments across multiple depreciation" title="Try our Accumulated Depreciation Calculator">assets that don't move in lockstep. When one Rate of rate-of-return" title="Try our Rate of Return Calculator">Rate of Return)">Return)">investment declines, others may remain stable or prorated-rent" title="Try our Prorated Rent Calculator">rent-increase" title="Try our prorated-rent" title="Try our Prorated Rent Calculator">Rent Increase Calculator">increase.

Levels of Diversification

1. Across Asset Classes

Mix price-to-earnings-ratio" title="Try our Price to Earnings Ratio Calculator">stocks, percentage-return" title="Try our Percentage Return Calculator">Loss Given Default)">bonds, and other depreciation" title="Try our Accumulated Depreciation Calculator">assets to smooth profit" title="Try our Economic Profit Calculator">Opportunity Cost Calculator">returns and reduce volatility.

2. Within Asset Classes

price-to-earnings-ratio" title="Try our Price to Earnings Ratio Calculator">Stocks: Own large, mid, and small-cap companies
Geography: Include U.S., developed international, and emerging markets
Sectors: Spread across technology, healthcare, Time Value of Money Calculator">Present Value rate" title="Try our Effective Interest Rate Calculator">Interest Factor of Future Value of Annuity Calculator">Annuity)">finance, energy, etc.

3. Individual Holdings

Own at least 20-30 individual price-to-earnings-ratio" title="Try our Price to Earnings Ratio Calculator">stocks if building your own alpha" title="Try our Alpha Calculator (alpha" title="Try our Jensen's Alpha Calculator">Jensen's Alpha)">portfolio, or use index funds for instant diversification across hundreds or thousands of companies.

The Power of Index Funds

Index funds house" title="Try our What To Offer On A House Calculator">offer automatic diversification at low cost:

S&P 500 Index: 500 large U.S. companies, expense price-to-cash-flow-ratio" title="Try our Price to price-to-cash-flow-ratio" title="Try our Price to Cash Flow Ratio Calculator">Cash Flow Ratio Calculator">ratios as low as 0.03%
Total Stock Market Index: Virtually every publicly traded U.S. stock
Total International Index: Broad exposure to non-U.S. developed and emerging markets
Bond Index Funds: Diversified fixed income exposure

percentage-return" title="Try our Percentage Return Calculator">Loss Given Default)">Risk Management Strategies

Understand Your percentage-return" title="Try our Percentage Return Calculator">Loss Given Default)">Risk Tolerance

Ask yourself: If your alpha" title="Try our Alpha Calculator (alpha" title="Try our Jensen's Alpha Calculator">Jensen's Alpha)">portfolio dropped 30% in a year, would you:

Panic and sell? You likely have low percentage-return" title="Try our Percentage Return Calculator">Loss Given Default)">risk tolerance
Feel uncomfortable but hold? Moderate percentage-return" title="Try our Percentage Return Calculator">Loss Given Default)">risk tolerance
Buy more? High percentage-return" title="Try our Percentage Return Calculator">Loss Given Default)">risk tolerance

percentage-return" title="Try our Percentage Return Calculator">Loss Given Default)">Risk Management Techniques

Dollar-Cost Averaging (DCA)

Invest a fixed amount at regular intervals regardless of market conditions
Reduces impact of market timing
Automatically buys more shares when prices are low
Natural percentage-return" title="Try our Percentage Return Calculator">Loss Given Default)">debt-snowball-avalanche" title="Try our percentage-return" title="Try our Percentage Return Calculator">Loss Given Default)">Debt Snowball vs Avalanche Calculator">strategy when contributing to 401(k)

Rebalancing

Periodically restore your target asset allocation
Sell outperforming depreciation" title="Try our Accumulated Depreciation Calculator">assets and buy underperforming ones
Forces you to "buy low, sell high"
Frequency: Annually or when allocations drift 5+ percentage points

Time Horizon Management

Match Rate of rate-of-return" title="Try our Rate of Return Calculator">Rate of Return)">Return)">investment percentage-return" title="Try our Percentage Return Calculator">Loss Given Default)">debt-snowball-avalanche" title="Try our percentage-return" title="Try our Percentage Return Calculator">Loss Given Default)">Debt Snowball vs Avalanche Calculator">strategy to when you'll need the money
Short-term (<3 years): High-yield savings, CDs, short-term percentage-return" title="Try our Percentage Return Calculator">Loss Given Default)">bonds
Medium-term (3-10 years): Balanced alpha" title="Try our Alpha Calculator (alpha" title="Try our Jensen's Alpha Calculator">Jensen's Alpha)">portfolio of price-to-earnings-ratio" title="Try our Price to Earnings Ratio Calculator">stocks and percentage-return" title="Try our Percentage Return Calculator">Loss Given Default)">bonds
Long-term (10+ years): Stock-heavy alpha" title="Try our Alpha Calculator (alpha" title="Try our Jensen's Alpha Calculator">Jensen's Alpha)">portfolio for maximum Time Value of Money Calculator">Present Value of Growth Opportunities)">growth

Sample alpha" title="Try our Alpha Calculator (alpha" title="Try our Jensen's Alpha Calculator">Jensen's Alpha)">Portfolio Allocations by Goal

Aggressive Time Value of Money Calculator">Present Value of Growth Opportunities)">Growth (Young Investor, 10+ Years to Goal)

70% U.S. price-to-earnings-ratio" title="Try our Price to Earnings Ratio Calculator">stocks (40% large-cap, 20% mid-cap, 10% small-cap)
20% International price-to-earnings-ratio" title="Try our Price to Earnings Ratio Calculator">stocks (15% developed, 5% emerging)
10% percentage-return" title="Try our Percentage Return Calculator">Loss Given Default)">Bonds

Moderate Time Value of Money Calculator">Present Value of Growth Opportunities)">Growth (Mid-salary" title="Try our Future Salary Calculator">Career, 10-20 Years to Future Value of Annuity Calculator">annuity" title="Try our Time Value of Money Calculator">Present Value of Future Value of Annuity Calculator">Annuity Calculator">Retirement)

50% U.S. price-to-earnings-ratio" title="Try our Price to Earnings Ratio Calculator">stocks
15% International price-to-earnings-ratio" title="Try our Price to Earnings Ratio Calculator">stocks
30% percentage-return" title="Try our Percentage Return Calculator">Loss Given Default)">Bonds
5% vat" title="Try our Realtor Commission Calculator with VAT">commission-calculator-with-vat" title="Try our Realtor vat" title="Try our Realtor Commission Calculator with VAT">Commission Calculator with VAT">Real estate or alternatives

Conservative Income (Near or in Future Value of Annuity Calculator">annuity" title="Try our Time Value of Money Calculator">Present Value of Future Value of Annuity Calculator">Annuity Calculator">Retirement)

30% U.S. price-to-earnings-ratio" title="Try our Price to Earnings Ratio Calculator">stocks
10% International price-to-earnings-ratio" title="Try our Price to Earnings Ratio Calculator">stocks
50% percentage-return" title="Try our Percentage Return Calculator">Loss Given Default)">Bonds
10% Cash/money market

Common Rate of rate-of-return" title="Try our Rate of Return Calculator">Rate of Return)">Return)">Investment Mistakes to Avoid

Emotional Time Value of Money Calculator">Present Value rate" title="Try our Effective Interest Rate Calculator">Interest Factor of Future Value of Annuity Calculator">Annuity)">Investing: Making decisions based on fear or greed rather than logic
Market Timing: Trying to predict short-term market movements (even professionals can't do this consistently)
Chasing rate-of-return" title="Try our Rate of Return Calculator">Performance: house" title="Try our What To Offer On A House Calculator">Buying last year's top performer often leads to disappointment
Neglecting vat" title="Try our Realtor Commission Calculator with VAT">commission" title="Try our True Cost of vat" title="Try our Realtor Commission Calculator with VAT">commission-calculator-with-vat" title="Try our Realtor vat" title="Try our Realtor Commission Calculator with VAT">Commission Calculator with VAT">Real Estate vat" title="Try our Realtor Commission Calculator with VAT">Commission Calculator">Fees: A 1% fee difference can cost hundreds of thousands over a lifetime
Over-futures-contracts" title="Try our Futures Contracts Calculator">Trading: Excessive house" title="Try our What To Offer On A House Calculator">buying and vat" title="Try our Realtor Commission Calculator with VAT">commission" title="Try our True Cost of vat" title="Try our Realtor Commission Calculator with VAT">commission-calculator-with-vat" title="Try our Realtor vat" title="Try our Realtor Commission Calculator with VAT">Commission Calculator with VAT">Real Estate vat" title="Try our Realtor Commission Calculator with VAT">Commission Calculator">selling generates mortgage-calculator-with-taxes-and-mortgage-calculator-with-taxes-and-insurance" title="Try our Mortgage Calculator with Taxes and Insurance">insurance" title="Try our Mortgage Calculator with Taxes and mortgage-calculator-with-taxes-and-insurance" title="Try our Mortgage Calculator with Taxes and Insurance">Insurance">taxes and vat" title="Try our Realtor Commission Calculator with VAT">commission" title="Try our True Cost of vat" title="Try our Realtor Commission Calculator with VAT">commission-calculator-with-vat" title="Try our Realtor vat" title="Try our Realtor Commission Calculator with VAT">Commission Calculator with VAT">Real Estate vat" title="Try our Realtor Commission Calculator with VAT">Commission Calculator">fees
Lack of Diversification: Concentrating too heavily in one stock, sector, or asset class
Ignoring rate-of-return" title="Try our Real rate-of-return" title="Try our Rate of Return Calculator">Rate of Return Calculator">Inflation: Being too conservative can mean your money loses rate-of-return" title="Try our Real rate-of-return" title="Try our Rate of Return Calculator">Rate of Return Calculator">purchasing power
Not Rebalancing: Letting winners run too much increases percentage-return" title="Try our Percentage Return Calculator">Loss Given Default)">risk

Building Your Rate of rate-of-return" title="Try our Rate of Return Calculator">Rate of Return)">Return)">Investment Plan

Define Your Goals: Future Value of Annuity Calculator">annuity" title="Try our Time Value of Money Calculator">Present Value of Future Value of Annuity Calculator">Annuity Calculator">Retirement, house down loan-payment" title="Try our loan-payment" title="Try our Student loan-payment" title="Try our Student Loan Payment Calculator">Loan Payment Calculator">Student loan-payment" title="Try our Student Loan Payment Calculator">Loan Payment Calculator">payment, Savings Plan Calculator">529-plan" title="Try our Savings Plan Calculator">529 Savings Plan Calculator">529-plan" title="Try our Savings Plan Calculator">529 College Savings Plan Calculator">College Savings Plan Calculator">education, etc.
Determine Time Horizon: When will you need the money?
Assess percentage-return" title="Try our Percentage Return Calculator">Loss Given Default)">Risk Tolerance: How much volatility can you stomach?
Choose Asset Allocation: Based on the above factors
Select Investments: Low-cost index funds are ideal for most investors
Implement Regularly: Set up automatic contributions
Monitor and Rebalance: Review quarterly, rebalance annually
Stay the Course: Resist the urge to react to short-term market movements

The Power of Starting Early

Thanks to rate" title="Try our Effective Interest Rate Calculator">interest" title="Try our Continuous Compound rate" title="Try our Effective Interest Rate Calculator">Interest Calculator">compound rate" title="Try our Effective Interest Rate Calculator">interest, starting early is the most powerful advantage you can have:

Age 25: Invest $500/month at 10% rate-of-return" title="Try our Rate of Return Calculator">Rate of Return)">return = $3.8 million by age 65
Age 35: Same contribution = $1.4 million by age 65
Age 45: Same contribution = $473,000 by age 65

Those 10 years from 25-35 make a $2.4 million difference! Start Time Value of Money Calculator">Present Value rate" title="Try our Effective Interest Rate Calculator">Interest Factor of Future Value of Annuity Calculator">Annuity)">investing today, even if it's just a small amount. Time is your greatest asset.