What My First Investment Portfolio Taught Me About Smart Allocation

Never put all your eggs in one basket.

When I first got into investing, I had a moderate appetite for risk. I didn’t know a lot, but as a young business reporter, I was eager to learn. Plus, I didn’t yet have a lot of money to invest, so even if I messed up, there wasn’t much to lose.

Aggressive investors tend to embody most of the following: they’re 20 to 34 in age, maybe coming into a raise or more money and feeling like they have all the time in the world; the monetary rewards from investing are just gravy to their already full, successful lives. An aggressive path is paved with risky, exotic investments, but also has the potential to yield the highest returns.

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On the other hand, conservative investors — those who choose safe investments with decent returns — tend to be older. That’s because the older you are, the less time you have over the long term to recoup any losses should any of your investments tank.

Now that I know what I’m doing, I’ve become more aggressive with my investments, but I still rely on built-in brakes and fire detectors to keep my portfolio from running too hot. Plus, without major financial obligations like a mortgage or other debt, I have more leeway to take on additional risk.

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Before I dive in, let me break a couple of things down for you, especially if you’re newer to some of this financial jargon:

  • Your “portfolio” is the whole shebang of all your investments: stocks, bonds, mutual funds, CDs — all that good stuff.
  • “Allocation,” in simple terms, is the breakdown of where you’re putting — or, allocating — your money.
  • The three main asset classes — equities (stocks), fixed-income (bonds) and cash — have different levels of risk and reward, so depending on what your goals are for investing, you want to balance the risk/reward by investing in varying amounts of each. (It’s the investing twist on the common adage of “don’t put all your eggs in one basket.) For example, an aggressive investor may have an 80/20 asset allocation, putting 80 percent in stocks, which have greater potential for earnings but also higher risk, and 20 percent in bonds or cash, which have less earning power but are safer investments. When your stocks are performing well under this 80/20 allocation, you’re making bank, but when they’re performing poorly, the bonds and cash will help to shore up your portfolio until the market recovers.

After I selected a brokerage firm and opened an account, I told them that I wanted to invest $5,000 and that I wanted to get aggressive with a 70/30 portfolio. At the time, I wasn’t exactly sure what my options were for different places to put my stock money and bond money, but they led me through the ins and outs of index funds. By the way, with an “index fund,” you’re buying into a little bit of all the stocks in an “index.”

The S&P 500 is a well-known index that represents the 500 biggest U.S. stocks; while a bigger index like the Wilshire 5000 covers basically every stock in America, including smaller and medium-sized companies — it includes around 2,500 stocks. (Contrary to its name, the Wilshire 5000 doesn’t actually include 5,000 stocks.)

I decided to put $3,500 in the Wilshire 5000, but then I had to figure out what to do with the $1,500 in bonds. The most popular index for bonds is the Barclays Aggregate Bond Index, so I went with that one. The next time I spoke to my brokerage firm, I was feeling even more confident and wanted to get a little more aggressive than before. So, with their help, I added international investments into my mix. Just like with fashion trends that move west from Europe, sometimes more significant exposure to up-and-coming investment trends that not all U.S. investors are hip to yet can bring amazing returns over to this side of the pond. (And yes, just like fashion, it can also be a disaster.)

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To invest in some non-U.S. companies, I was referred to the MSCI EAFE Index (which covers the developed world outside the U.S. and Canada.) Think Budweiser, which is owned by a Dutch company. You can also invest in buzzy countries like Brazil, Russia, India and China via the MSCI Emerin Markets Index. This time around, I put $3,500 in the Wilshire 5000 as I had before, $500 in the Barclays and $1,000 in the MSCI EAFE Index.

Even while I was ramping up some risks, diversifying my portfolio helped me to avoid taking on more than my bank account could handle. After my initial willy-nilly allocation, there are ways in which I became smarter about divvying it up.

In hindsight, I shouldn’t have invested all of my money at once. It would have been better to invest my money over, say, six months, one-sixth at a time. That is, in month No. 1, I’d invest $750 of my stock money, the same the next, and so on until it was all invested. This is called dollar-cost averaging.

Dollar-cost averaging takes the mystery out of trying to pick the best time to put money into the market because it gives you more of an average of what the market is doing at that time. You want to buy in when the market is low, obviously, but since the market bounces around a lot, there’s just no way to predict when it’s going to be low. I mean, you could guess and hope to buy in low, but what if you buy super high? Whoops. That’s why it’s better to get an average of what the market is doing around that time. Some purchases will be lower, some higher, and that’s OK. That’s the point. You’re spreading it around — and, ideally, it balances out to the average in the end.

Smart allocation not only means investing your money over a period with dollar-cost averaging but also revisiting your investments from time to time to make adjustments as necessary. Your yields are going to ebb and flow, so don’t get crazy about it, but keeping an eye on how your portfolio is performing — and, for example, moving some money out of stocks and into bonds during a downturn — is the best way to ensure you’ll come out on top.

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