Why You Should Invest and How

Probably Easier Than You Think: 4 Simple Portfolios

Exchange Traded Funds (ETFs) make it easier than ever for “Do-It-Yourself” investors of all income levels to achieve financial freedom. How? They provide investors with the tools to create portfolios on their own, which may be more advantageous than mutual funds and individual stock picking. Here are a few reasons why:

  • Lower Costs: ETFs fees are generally a fraction of those of mutual funds.
  • Diversification: ETFs may own hundreds or even thousands of securities.
  • Transparency: Easy to see portfolio value and holdings on a daily basis.

Click here to learn more about the advantages of ETFs.

This article provides a roadmap of 3 easy steps:

  • Plan: Build a safety net – > Build a portfolio.
  • Start: Invest regularly to your portfolio.
  • Grow: Watch your wealth grow – > Add bonds as you age.

Stocks, Bonds or both?

The chart below depicts the hypothetical return of $1 invested in stocks versus $1 invested in bonds over 40 years. If an individual invested $1 in the stock market 40 years ago, that investment could potentially be worth $85 today. Instead, had that same individual invested $1 in bonds that investment may only be worth $17 today. Why is there such a large difference in investment returns? Let’s take a look at some of the differences between stocks and bonds in order to find out.

$1 in Stocks vs. $1 in Bonds over 40 Years

Source: Bloomberg Data as of 08/30/2018. *Stocks is an illustration of the S&P 500 Index. **Bonds is an illustration of Bloomberg Barclays US Agg Total Return Value Unhedged USD.

Stocks vs. Bonds: A Comparison

Own part of a company?YesNo
Debtholder of a company?NoYes
RiskMore RiskLess Risk
ReturnBased on the growth of the company's valueBased on interest payments on a debt

Investment Goals Examples:

  1. Safety net (6 months of expenses)
  2. Condo down payment
  3. Long-term savings

Can investing be as easy as ABC?

Below are 3 sample ETF portfolios for 3 types of investors. The goal is to potentially help you find out what type of investor that you are. Generally speaking, most investors construct their portfolios using a combination of stocks and bonds. Depending on your age and goals, the proportion invested in each may change.

Before investing, it may be recommended to have a safety net of savings to cover 3-6 months of living costs. Want something with better returns than a savings account? Take a look at this power savings example. It has typically returned 1-2% more than the average savings account.

Below is an example of a power savings portfolio (Investors may want to pick 2-3 ETFs per ETF category):

Power Savings Example: Short-term/Safety Net

ETF Category% of Portfolio
Ultra-Short Bonds50%
Ultra-Short U.S. Gov. Bonds50%

100% Short-Term Bonds

  • Ultra-Short Bonds, 50%
  • Ultra-Short U.S. Gov. Bonds, 50%

How old are you?

Growth Portfolio: Long-term investment horizon

A portfolio comprised primarily of stocks may be appropriate for younger investors with long-term investment goals. Younger investors, growing their wealth for retirement, have the benefit of a longer investment period to achieve their portfolio return goals. This gives younger investors the ability to assume more risk than investors with less time to achieve their investment goals.

Below is an example of a growth portfolio (Investors may pick 2-3 ETFs per ETF category):

  • U.S. Large-Cap Stocks, 20%
  • U.S. Small-Cap Stocks, 10%
  • U.S. Growth Stocks, 10%
  • U.S. Value Stocks, 10%
  • Dividend Stocks, 10%
  • International Stocks, 30%
  • U.S. Bonds, 10%

Balanced Portfolio Example: Medium – long-term investment horizon

A portfolio balanced between stocks and bonds may be appropriate for middle-aged individuals seeking a more moderate approach to investing. As individuals approach later stages of their career or lives, they may benefit from adding bonds to their portfolio in order to lower risk. By reducing the allocation to stocks and increasing the allocation to bonds, investors may compromise growth in favor of risk reduction.

Below is an example of a balanced portfolio (Investors may pick 2-3 ETFs per ETF category):

  • U.S. Large-Cap Stocks, 10%
  • U.S. Small-Cap Stocks, 5%
  • U.S. Growth Stocks, 10%
  • U.S. Value Stocks, 10%
  • Dividend Stocks, 10%
  • International Stocks, 15%
  • U.S. Bonds, 40%

Conservative Portfolio Example: Retired or approaching retirement

A portfolio consisting primarily of bonds may be appropriate for older investors seeking to preserve the value of their investments and to generate income. This may suit investors that are retired or approaching retirement age.

Below is an example of a conservative portfolio (Investors may pick 2-3 ETFs per ETF category):

  • U.S. Large-Cap Stocks, 10%
  • Dividend Stocks, 10%
  • International Stocks, 10%
  • U.S. Bonds, 70%

The above charts and tables are for informational purposes only. It is impossible to predict future growth and actual results may vary.

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