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.
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.
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.