Assembling a Portfolio 📂

You must reflect on what you really need and want from your investment portfolio before buying any actual stocks. Depending on where you are in life, different splits between investment types will make sense. This lesson explains those investment types, stocks and bonds, and is a crucial step for the serious investor. So, notepad and pen at the ready, let’s do this!


The Asset Classes Out There 🔍

You can buy stocks and bonds from every good broker, including all that I mentioned in lesson 2.

Stocks
Description: A share of a business’s profits, accessed either through a rising stock price or a dividend.

Risk: Adventurous but not foolish. Intelligence is required to stock pick.

Buy: An Index fund like the Vanguard 500 that holds every company on the S&P 500 stock exchange in America. That’s an investment in stocks you never need to think about. Just let it sit there long-term. Alternatively, pick your own stocks for the potential of making far more money.

Bonds
Description: You lend money to a business or government. They hand it back after so long but pay you a percentage interest rate every year until then.

Risk: Very low chance of anything going wrong with government bonds from first world countries. Inflation is the only thing threatening to eat up your yield.

Buy: A government bond fund, which is like an index fund for bonds. For example, Vanguard’s VBMFX.

Cash
Description: Savings in your bank account. This money earns an extremely low return from an extremely low interest rate.

Risk: Extremely low (none), as you’re behind an established dollar or pound. Again, inflation is the only headwind.

Buy: Nothing, that’s the point. High yield savings accounts exist but they usually lock your money up like a bond does for X number of years. Read the small print on HYSAs.

Real Estate
Description: Putting a mortgage down on a house. You watch the value of the house rise in tandem with inflation as you charge rent to tenants living inside. The rent pays off the mortgage and then some. This can be very lucrative with a favourable mortgage and rental roll.

Risk: Calling for honesty, quite high. It’s entrepreneurship, and you’re putting your credit rating on the line to actively find yourself good property at a good price. Tenant risks, too.

Buy: A house, apartment, condo etc. You can buy offices, student homes, warehouses, and other types of building to rent out.


What is a Bond? ✍

A bond is a very low risk investment that should guarantee you fixed income, as opposed to the variable up and downs that come from stocks. The purest and most popular type of bond is a government bond. In the UK, these are called Gilts. In the US, these are US Treasuries. To buy bonds individually, they come in $100,000 lot sizes. That’s why it’s better to buy a government bond fund ETF (Google it) for an accessible and low-fee way in. You get the exact same exposure.

All investors should own at least a small amount of bonds (min. 10% of portfolio) unless the yields are negative (NB. German bund yield in 2019). In that case, keep the money in cash.


How Does a Bond Work? ✍

When you buy a bond, it’s you lending money to a business/government. Say it’s a government, the government has taken a loan from you and will pay you the money back after a set period of time (1, 3, 5, 10 years etc.). Until that date, it will pay you a percentage interest rate every year. That’s your return.

Government bond funds are ready-made baskets full of bonds that the general public can buy . The details of the contents of that fund don’t matter, the fund is tracking bonds which is the main thing.


Who Sets Interest Rates ❓

Central Banks. It’s the ECB in the Eurozone, the Bank of England in the UK, the Federal Reserve in the US, and the Bank of China in China.

This is the website I use to see US and UK rates.

Just react to rates, don’t gamble on where they’re headed in the short-term. In the long-term, see my content on macroeconomics to understand the interest rate cycle and predict its pattern.


Remember… 💭

Don’t forget about bonds

The popularity and dynamism of an investment means absolutely nothing. If we’re trying to grow wealth, we don’t care what the hubbub sounds like on the Street. If bonds make more sense to buy that stocks, bonds should be bought.

Carve out an emergency fund and pay off non-mortgage/student loan debt before investing

This is due diligence stuff. We have emergency cash balances at all times in case we’re ever under pressure to front a surprisingly large cost. Sometimes, stocks, bonds, and real estate can be painful to sell.


 

Chris Morrissey

Chris started in financial advisory, assembling client portfolios with pension companies and investment banks. Following that, he worked at an agricultural commodities trader in London and now various "fintech" start-ups. He's also studying business full-time at Lancaster University. Feel bewildered by the stock market? Chris will help you get things under control.

View all posts