Ep 56: How to Construct & Manage an Investment Portfolio

Hey Jess, you ever heard that Kenny Rogers song I think where it's like, you gotta know when to hold them, know when to fold them, you know what I'm about? I'm just enamored by your voice right now. I did hear that song actually. It's called The Gambler, but still I think about that when I'm thinking about my stocks and other investments because I want to know how long are we supposed to be holding onto a stock or a fund for?

or other investment and when do we sell it or decide, the stock's not performing well. I should be quote unquote folding this hand. It's not planning out the way I thought it would in my strategy. Yes. Keyword strategic. We got to be a mastermind because if you fail to plan, you plan to fail and strategy sets the scene for the tail. Jessie. So words from a great, great writer. I wonder if you could have possibly said that. Yes.

So let's talk about constructing a portfolio, portfolio management, rebalancing, what diversification actually is, setting goals, time horizon, all of the important components of creating a portfolio and managing a portfolio. Yes. We're our construction hats on today. Best episode ever. Yes. I love strategy, and I love our constructing our little dream house. So let's go. Make you mastermind.

You're listening to Market MakeHer, the investing education podcast for all levels of self-directed investors. We teach you complex financial concepts in a relatable way from her perspective. I'm Jess Inskip, your teacher with 15 years of finance industry experience. I was even licensed for 10 of those years here to break it all down for you. No longer licensed anymore. This is not financial advice, even though I was a financial advisor. Don't take it that way. Investing involves risk.

And I'm Jessie DeNuit, here to learn alongside you and ask all the questions you were thinking and keep Jess out of jargon land. That's right. Financial jargon land. You'll never ever get me out of Taylor Swift's land. The little Taylor Swift wonderland. Happy place. Today we're going to discuss portfolio management and I've been waiting for this episode for so, long.

I love how we've built a lot of foundational knowledge and we've learned how to pick a brokerage firm and figure out what kind of accounts are best for us based on our tax situation. We learned how to choose investments. We learned how to analyze the stock, what compound interest is. And now that we have money investing into our account or accounts and we've been buying stocks, ETF, mutual funds, et cetera. How do we now know?

how long to hold on to them for or when to go ahead and sell them. Like, what are we supposed to be doing in our portfolios now? All right. There is a whole order of events that we're going to go through. And we are a self-directed investing education podcast. What I'm going to walk you through today, though, Jessi, is literally the types of conversations you would have with a financial advisor. And they would also do these on your behalf. We should talk about the different solutions to it. They're self-directed. Some of this robo advising would do.

but other things financial advisors would do for you. Somebody left us a really great comment that said, even know what questions to ask my financial advisor. So this episode will serve you wherever you are in your investment journey. I think it's good to start with that. We got to start with understanding your goal, defining your risk tolerance. We'll go through constructing your asset allocation, because that's going to help you determine when to sell. That leads to rebalancing and adjusting, which means

selling and buying, adjusting that percentage allocation, and we'll define this all. And then we can talk about the easy way of looking at market weights, analyst recommendations versus the market. There's actually a lot of tools and resources at your brokerage firm you can use to make this super easy. And they're fun. But yeah, let's talk about goals. OK. Why are you saving your money? And you could have different reasons to save your money and different goals in mind, meaning you might say, OK, I'm just saving for retirement.

Okay, that's your retirement account. Or you might be saving to buy a house, or you might be saving to buy a new car. You might be saving to pay for travel. You might be saving for a wedding, whatever that is. That's your goal. What are you saving for? You're saving for your child's education. So my goal is personally, I have a retirement account. So that's I'm saving for retirement. I have an account where I intend to save for Cole, my child's education. I want to make sure that I can pay for his college.

Or if he gets a scholarship, that's his incentive. And it's something that I've been doing for years. And it helps because of the power of compound interest. And then I also personally have another account because I really like to shop and travel. So I use that. And you're like good at the stock market. So some instances. yeah, a lot of instances. Nonetheless, but then your goals have time. Like my retirement is, I mean, I want it to be a lot earlier. But who knows? But I also really like working, which is weird.

But it's around 65 is normally what we're looking at. That's on average, right? But for Cole's college, for example, he's 13. I've got another five years. So there's a huge difference of another 30 years to invest versus another five years to invest. Yeah, that makes sense. So that's why time consideration is important. OK, so timeline consideration is like part of defining your goal and your financial objective, right?

Yeah. So like, you know, when you set goals at work and you've got those quarterly reviews. yeah. Your smart goals. Yeah. What are the smart goals? I forget that acronym. What is it again? Specific, measurable, achievable, relevant, and timely. Yeah. I like that. See? Same thing. We're gonna do the same thing here. And we talked about giving your money a job recently, last episode before that. I mean, it of ties in. Like now we're gonna do some smart goal reviews with your, the job you're giving your money.

Exactly. And then you also need to understand is if it's for retirement, is it an income need? Your goals change. You change. So we want to reassess them and adjust them often. But that's number one is just understanding your goal. If you go to the tools and calculator section on most of your brokerage firms, you can find something called an investor profile questionnaire. We call it IPQ for short.

These are questions that your financial advisor would ask you, but there's also like little quizzes you can take to help you understand your goal and define it. And then the next section, which would be your risk tolerance. Cool. So you can do that like for each type of account you have? Yeah. And then it will help you understand if you need a balanced portfolio or an aggressive portfolio or a short-term portfolio, an income portfolio. And we will go through that. But we call that your investment objective.

You want to define your investment objective. What is that? OK. The second thing we're going to do is define your risk tolerance. We did a lovely episode on the risk scale. And the risk pyramid. Yes, that's right. So understanding where that is, it's important. But we need to understand your personal risk as well. Because it's a roller coaster. What's your capacity for risk? There is a psychological aspect to investing. I was having this conversation with my dad the other day. He's so much more comfortable investing in real estate.

than the stock market. Which is funny because y'all live in Florida and there's a hurricane heading to you literally right now. As we speak, we're on a time crunch before I lose power filming this episode at this moment. We show up for you guys. Yeah. We weather the storm. We weather all storms. That we do. For financial literacy. It's all for the goal. is. But nonetheless, I think that's so interesting.

because real estate's higher on the risk scale than the stocks. And maybe it's because you can touch and feel it, and you don't have someone telling you that you're losing money on that investment. And it's something you literally see. you're right. It's tangible. You can look at it and see how it's doing. You can see the repairs you need to make. It's like out of sight, out of mind. I forget about my retirement account all the time. And I'm like, wait, am I supposed to be doing something in there? Or my other accounts even? I'm just like, am I supposed to be doing something?

Great. You forget. It is. So it takes some inner work in yourself. really does. What's your capacity for risk? Because if you sell out of that portfolio, that could have severe consequences. And that's why it's important. Once we come up with your strategy and your asset allocation and we follow these steps, you have to stick to it. And that's why we talk about emotional investors. If you think that you have a propensity towards being an emotional investor, it's just good to take all these things and

mine. How soon do need this money? How like risky can you get? How much money are you willing to lose if it's a short term money goal? If a long term money goal, maybe you can be a little bit riskier now and then like, you know, have a different risk tolerance when you get closer to retirement. So those are all things that those tests and tools I'm sure help you figure out. you literally did the most beautiful lead. I'm here for it. That's the importance of it. We have laid

It's such a solid foundation, so you understand it. You're stepping on the roller coaster. If your destination is a lot closer, you can't afford to go up and down so much. But if you have a long way to go before you need those money, you can hang out in the theme park a little bit. It's not closing soon. You can afford to be riskier. It's important to know your time horizon. Because if you do experience a bad time, where we enter into that recessionary period within the business cycle, and that's where you need the money,

That's the worst time to cash out. The true diversification means that it doesn't go up all at the same time. makes sense. Being invested in just an S &P 500 passive ETF means your stocks are diversified. It does not mean your portfolio is diversified. And that's how we did the episode on like the introduction to bonds because that's a way to diversify your portfolio. There's times when the stock market is not doing as well, but the bond market is. So it's

If you're the more diversified you are, right, the more spread out your investments are. And when something's down, something else can be up. And that's how you kind of even it all out. Right. That's right. Exactly. So this moves on to how you construct your asset allocation. This is where the risk scale episode would be so helpful because we're going to go through each asset class, let you know where it is on the risk scale. The higher it is on the risk scale means that the higher capacity that you have for volatility, higher risk, higher reward. Volatility just means up and down zero on an aggressive roller coaster.

And we call that a performance versus volatility trade-off, risk versus reward. That's what we're looking for. How much risk am I willing to take? More risk, more reward potential, less risk, less reward potential. Simple as that, I suppose. Nonetheless, high level from that episode, lower on the scale is going to be cash and cash equivalents. And so when we...

do a asset allocation, we call it short term investments. That is literally cash that includes treasury bills and that includes money markets. I would lump into those type of investments. Bonds are fixed income products, even though treasuries are technically bonds. I would lump in investment grade bonds, which are those triple B or higher. So you can see why we needed to talk about everything else before this. Yeah, we had to do that bond that is so first. Yep. And then stocks.

large cap equities. The smaller the cap, the higher the risk as well, because it's a smaller company. And then foreign stocks actually offer some aggression as well. If you were on our newsletter, you would have seen that China was really rallying. Great call, by the way. I put on there, didn't believe it because the lack of fundamental backing and it was just stimulus for buybacks and then China really sank down. So you would have known that. that is a part of

asset allocation, and then there's, of course, alternative investments, which could be your real estate commodities, could be currency, it could even be options that you can add to that portfolio, all based on your personal risk tolerances. Once you decide your goal, you have your time horizon, you know what risk you can handle. Now it's time to create that portfolio. And I've got some historical figures just to help you understand what they are. So normally what you get is something called

conservative, balanced growth, or aggressive growth. Those are four types of portfolios. OK, those are four different. I see. Yes. Conservative, balanced growth, and then aggressive growth. These are four different types of portfolios is what you're saying? That's right. So it's the way that you create your asset allocation. And we're talking about asset allocation. It's just like, look at your portfolio as like a pie chart, or like a And so you're talking about how much of

this portfolio is dedicated to like stocks, bonds, whatever, right? That's right. Yes. Yes. So if you're conservative, I would expect 15 % ish in stock. Conservative with your money, not politically, obviously. That's right. Yes. A conservative portfolio. Smaller about stock, more heavily in bonds, maybe half of it in bonds. 30 % of it would be in cash.

and then a small portion in foreign stocks or something like that. But the whole point of that is the majority is going to be in something like a fixed income product if you're a conservative. So this is if you're like lower risk on the risk tolerance scale or whatever. That's right. And there are questionnaires you could literally pull out. There is the Morningstar X-Ray tool. We could link that. That is public and available.

Almost every broker term uses Morningstar. Just look for portfolio X-ray. You could fill out a questionnaire and it will spit out these type of portfolio allocations. So you don't need to memorize what we're saying right now. So I'm telling you and we'll those in the show notes as well. it. Perfect. So just the high level of it. Balance means that it's pretty evenly distributed between stocks and bonds. So 50 % of it is going to be bonds and cash. 50 % of it is going to be

stocks. Okay, that's a balanced portfolio. That's balanced. And that makes sense, right? Like you're on the scale. Think of it as a, what are those things called? You know, the weightings that go side to side, like you tip the scale. Yeah, like a scale. Like, but the two Because we're in Libra season, we're in Libra season. So you think of that like Libra symbol where it's a scale with the two trays, you know, and like you tip one, and it goes down.

and the other one goes up, you know, you're talking about that? Yes, I need everyone to keep that in their mind this entire episode. This episode is brought to you by Libra Season. so that's balanced. So if we have conservatives, the scales are going to tip more towards bonds and cash. We have balanced. It's going to be evenly distributed 50-50 of cash and bonds on one side and then equities with the US and foreign on the other. So evenly distributed. When we get into gross,

That means you've got about 60 % now in that equity side, 40 % that's that 60-40 portfolio that's very famous in the fixed income and cash side. And then aggressive gross, that's 85 % on equities and still a small portion of bonds because you're not diversified if you're just in equities. That's not true diversification.

And anybody who tells you that is a self-proclaimed money expert. need stocks, bonds, all the things. That's right. Foreign stocks. Short term, long term. Like all the things. Get them all. Yes. Now from those port- It is. gotta catch them all. Nonetheless, the aggressive growth portfolio has more volatility than the conservative portfolio. But it also has more growth potential. So I'm going to give you some historical figures. OK.

going back 20 years of what these type of portfolios would have looked like. And I think it's super helpful. Now the variance isn't that big, which I think is interesting. So the average annual return of aggressive growth was 9.5%. Growth is 8.8%, balanced 7.8%, and then conservative was 6%. OK, yeah. So the aggressive growth is a few percent higher, which, you know, could make a big difference if you have a lot of money in there.

The best 12 months, if we were to take the best year out of there, the aggressive growth made 136 % in one year. That's a lot. Yep. Whereas the conservatives' best month was 31%. Yeah, that is a much bigger difference. Yes. Now, if we were to take the worst 12-month return, the aggressive growth's worst was down 60%.

Whereas the worst for the conservative was down 17%. I see now. Yeah. So that's called the volatility performance trade-off right there. And that's why it depends on how long you're planning on keeping your money in because like, you know, some years there's pandemics and some years there aren't. So like it depends on what's going on. That's so true. So now let's talk about how you would adjust and proper, proper asset allocation.

Yeah. So that we're finally talking about this. your question here. So this is what we needed to know to understand it. So let's say you decide for your retirement account, you're going to be aggressive growth because you've got a long time. We're going to do 80 percent in stocks and then 20 percent in bonds. So let's say we have 80, 20. OK. Usually they work in an inverse relationship. Not always, but a lot of times if the market is selling off, so stocks are going down, bonds tend to rise. They tend to work in a seesaw.

most of the time. Doesn't always that way because it never is. Let's say you get a huge rally in technology, which happens because now technology is a huge part of the stock market. So your 80 % portfolio is now 90 % stock and equities and 10 % bonds. You're not at your target asset allocation. So what you would do is you're going to sell those stocks.

just a portion of it to get you back to 80, which forces you to sell high because you're over overweight, you're overextended. Those are where those words are coming from. Stocks, and you need to bring it back down. And then you're going to buy your bonds, probably low, and bring it back to 20%. But I have a question. proper asset allocation. Yes. If you were already 80 % stocks, 20 % bonds, how does it change 90-10 on you because of mutual funds or something? Well.

If stocks are rallying, this is where that rotation thing happens. So if stocks are normally, that's why I say this as normally, when your stocks are rising, bonds are going down because that means people are moving out of conservative into aggressive. Wait, so hold on though. When we talk about asset allocation or we're looking at our little pie chart for our account.

The 80-20, it's not just like our initial investment. Like I had this much money to put into this account. 80 % of it I invested in stocks, 20 % I invested in bonds. It's looking at where it's at now, like how the performance of that is. So it's like, okay, that's what you put in, but now your stocks are making a lot more money than the bonds are. So you have like more, is it, like what is the term there? Like what are we looking at? Your gains?

Yeah, that's right. You have too much now. Now you're outside of your target asset allocation because you would be 90 % equities and 10 % bonds. As in it's overtaken your portfolio. Your bonds haven't grown at all or not as much as the stocks have. And this is just like an extreme example with round numbers. When you rebalance, you bring it back to your target asset allocation. OK, so that's what rebalancing is.

Seeing that you're making a lot of money in stocks, which is great, but you want to keep that balance because that's, you know, what you set up for your whole target, your goals, everything you've assessed that we talked about in beginning. And so now you got to sell some of that stock profit and what you just put it into more bonds, like you buy more bonds with the money you sell from the stocks. Right. Or whatever is is lower there. And we just started at a high level. Now you can take your equity portion, too, and even

apply something very similar where that could just be something passive in SPY, VOO, QQQ, or whatever. you can even, Fidelity has a great tool where you can pull up every sector of the S &P 500 and then you'll have an analyst recommendation where they might say, be overweight technology, be underweight consumer staples. same type of, same, well, same thing. You would see what percentage of

the S &P 500 is technology. And then if it says overweight, it would have a recommended weight. There are sector ETFs. So you could make a sector portfolio instead of just the S &P 500. So being more tactical. utilizing the sectors, like we talked about a few episodes ago. Yeah, that makes sense. So you see that, yeah, if you're investing all of the OO or whatever, like S &P 500 index funds, then.

you see, like we know that that's like overweight in tech like we're saying or whatever it is. Now you know you can look at other sectors and start investing. So that's just the way to diversify basically. It's like, okay, I don't want to put everything in the SME 500 forever. I want to like have some specific sectors I'm investing in or some other little like specific things. Are you good into that? Yeah. Yes. Yeah. So when we say all in stocks,

Those stocks have to be diversified. Yeah. Not one All just S &P 500. Yeah. I mean, S &P 500 is still diversified stocks. Yeah, definitely is. 500 companies. Yes. That's diversified. But that's not diversification. That's diversification of a portion of asset allocation. OK.

Whereas bonds also need to be diversified, which could be solved by a fund. So here is, I think, an important part to know about investing and your different roads that you can take to investing that we talked about on episode one, what is self-directed investing? Self-directed investing means you're going to do this yourself. You're going to come up with that asset allocation. Maybe you start by being very aggressive and have 100 % equities, and that's totally fine because you can take on the risk and you have a longer term time horizon.

Once you get over that 10,000 mark, you decide you're going to add a little more exposure to a sector or maybe you even add a stock or something like that. But you're going to create an asset allocation for yourself and to be truly diversified, you have to adjust that. If you were to do robo advising, if you've ever tried that before, they'll ask you a questionnaire, what's your goal is, what's your time horizon, what's your risk tolerance, and they will automatically do this for you.

cool. That's what it is. They just constantly keep that asset allocation. That's robo-advising. And that costs money, Normally, yeah. Normally, it's minimal, a little fractional fee. It's time as well. Time is a really, really, really hot commodity in my mind. So it depends on what you have, right? Time, will, or skill. And then the third, of course, is working with a financial advisor.

They are going to do that rebalancing for you. It's kind of a combination of both. What you should do is a self-directed, but you are outsourcing that to your financial advisor. And then they're going to use tools to rebalance it automatically. And there's the differences. And we do have an episode on joining a financial advisor. That's right. do. And remember, you can always talk to them for free. Yeah, free. If you have a brokerage account and a brokerage firm, call them up and ask them questions. Yes.

Now, this restoring your portfolio to its asset allocation, when should I do that? It's really up to you. You're the architect of your life. I personally, I look at it every day. this is my job. I do not. And that's why we're having this episode. like, what am I supposed to be doing? Somebody tell me. And maybe we should have an episode where you actually do it. at least quarterly. Quarterly still may be a lot.

I would say at least twice a year, definitely during tax time, do that before the end of the year. We want to definitely do it before the end of the year. Yeah, we should talk about tax obligations. that's another thing I don't understand. So when you're rebalancing your portfolio and you sell off some stocks because you have too much in there and you need to get more bonds, do you have to pay taxes on those stocks that you sold off within your account? If it's in a taxable account, absolutely. That's a triggering tax event. You are creating a sale. That means you have a realized gain or loss.

Which means you factor that into your year. You do. Absolutely. And how much in taxes you're willing to pay. If it makes sense to do that. And I guess like, I mean, you want to rebalance your portfolio, but you also want to consider, OK, if I sell off 10 % of my stocks to get it back equal to the stock bond portion or whatever it is, then how much am I paying in taxes now versus is it worth it or whatever, right?

Did you hold it for 12 months? Is it long term? Is it short term? What stock are you going to choose? Makes a difference. always forget about that. Absolutely. Is it a stock you're going to choose? Is one overextended? And the beauty of doing it this way too, is it forces you to do a little bit at a time, not a lot at once. Because we're using extreme examples, even though technology does that. And a lot of people might have experienced that with Nvidia. And you might be holding onto it and being like, gosh, the tax consequences here.

Yeah. It could be a little bit at a time. You don't have to do everything at That's why it's probably good to look at it quarterly. Or like we're saying, like have a robo advisor or a financial advisor help you if you're really just like, okay, this is too much for me. I don't have time for this. Absolutely. And you can also be tactical if you have a loss elsewhere that can offset those gains because it's netted together. We should do an episode on DAXs still. We will. will. That we will.

And then the last part of adjustments that is very important is life changes. When you get married, get divorced, have a kid change your job, that changes your needs and personal goals, which means your asset allocation may change. A huge raise, you could take that conservative portfolio and start being super aggressive. Go for it. know? Yeah. The inverse is also true, but as decided to talk about something happy.

Well, I need to talk about something happy in these dark, trying hurricane times. is. It really is. Once you decide your asset allocation, then the point is to stick to your asset allocation. Then you can have fun in picking stocks and understanding, OK, maybe I need to add more to my stock portfolio. How do I analyze the stock? How do I get an idea? Or maybe you have a theme for the year. I like the idea of quarterly check-ins for sure. When you have to do those quarterly reviews with your boss, you should

do a quarterly review with yourself as well. Yeah. like it. I like doing a quarterly review with myself, like not just for my portfolio management, but for everything in my life. Like, yeah, by following my personal goals, my own smart goals. That's important. Investing is part of life. It is part of that because you're saving for future you. Yeah. You got to take care of future you. All right. Well, key takeaways of this episode when you're talking about portfolio management and construction.

You want to set clear goals. So those smart goals we talked about define what your risk tolerance is for each account. Cause remember you can have more than one investment account in retirement. You can have a college fund for your kid. You can have one for like a house you're trying to purchase. So you need to have clear goals for each and a risk tolerance for each. Diversify, allocate your assets strategically and rebalance regularly to do those quarterly checks. What else is a key takeaway?

Definitely that this is personal to you and it evolves over time. Financial situations change and that's okay. If you start out early, you can afford to be super aggressive normally and it could be small portions a month. But as you get closer to retirement, it ends up being more conservative. That's why target date funds were made. Yeah. Yeah. They're easy to set and forget. That's what they And you know, your money mindset.

might change over time too. You might have grown up with like a scarcity mindset because that's just the environment you were raised in. And then, you you might work on that and get less timid about investing as you learn more. And so you can change your risk tolerance and your strategy over time. Nailed it. Beautiful. this wasn't as hard as it felt. No, this was good. This was like information we definitely need to do. And remember, you can always, of course.

call your brokerage firm, talk to someone for free. And then you can always, of course, submit questions to us. And we haven't done a Q &A episode in a while, so we can do another one if we get enough questions. So if you have any questions about any of this, feel free to send it through a form on our website, MarketMakerPodcast.com, or we have all the links in the show notes, as always, all of our social platforms. And don't forget to sign up for our email newsletter, because Jess has been...

doing a beautiful job at giving us lots of information on what's going on in the stock market. And you can choose to use whatever of that information you would like. And you can ask us questions about that too. Yeah. Also, I would like to take suggestions on what we should call it. I did say straight from the Tortured Investors Department. Yes. I'm considering a Taylor Safe reference. It is? What? I'm considering stock market mastermind.

Or, look what the stock market made me do. So. Why? It's too long. I can't have it. Look what the market made me do. Maybe. OK, maybe we'll think about that. Maybe we'll take a poll. Well, I do like mastermind. Makes me feel like, you know, an evil villain or something, a mastermind of an organization where I'm making lots of money. So.

can go to someone who hates capitalism. is the first time I've ever heard. It's hard. I I'm like talking about the leaver season. one hand, I'm like capitalism is awful. I hate it. On the other hand, I like money so I can like live the life I want and do whatever I want and I have to work until I'm 90. Well, I know there's I know there's balance because we've had so many offers to sponsor this podcast, but we were like, absolutely not. I will not let that real listeners. Yeah, we were protecting their value. Lovely listeners.

at our cost. Yeah. If you this in another podcast and you notice that there's a theme somewhere, said no. Anyways. Well, yeah, we'll talk about being a mastermind. Are you making me say this Taylor thing? I didn't know if you would know it was. I did it. it. It's a Taylor. Just read it. Just read it. Well, then construction hats, merch coming soon. I know I feel like I know how to lay the groundwork.

have the dominoes cascade in a line because you're a mastermind. And now you're mine. It was all by design. And if you want to be a mastermind, don't forget to subscribe to our super awesome weekly stock market newsletter filled with more Taylor Swift references. You see, all the wisest women had to do it this way. All of them. Sorry.

or share this podcast with a friend or a Swifty, because I'm sure they'd like it. I don't know why I'm so giggly today. In the middle of a hurricane. You're delirious. Because I live in Florida. Yeah. I am too, because I have you and family and friends still in Florida, so I'm watching it. Well, leave us a review or tell us how you really feel in the comments section. And remember.

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