How to start an investment portfolio
What is an investment portfolio?
An investment portfolio is a collection of different types of investments or asset classes, including stocks, bonds, cash and other securities.
At Edward Jones, our primary focus is helping you achieve your long-term financial goals by selecting the appropriate asset allocation – or mix of investments – for your portfolio.
We do this by helping you choose a portfolio objective. Before you select one, we’ll want to discuss:
- Your goals
- How comfortable you are with risk
- When you’ll need the money you’ve invested
We believe that by understanding what’s important to you, we can work together to review your options and help select an appropriate portfolio objective.
How much do you need to start an investment portfolio?
You can start building your portfolio with as little as a few hundred dollars and add to that amount as you earn and save more money.
1. Weigh your tolerance for risk
Risk and return go hand in hand, but a key is striking the right balance for you.
That’s where your risk tolerance comes in, which is simply how you feel about taking investment risk.
Generally speaking, the more stock investments you own, the more ups and downs you’ll experience in your portfolio. But you’ll also increase your potential for higher long-term returns.
We want to help you find the right balance between the risk you’re willing to accept and the returns you anticipate receiving. Then you’ll be in a better position to stick with your investment strategy regardless of what the market is doing.
2. Understand your time horizon
Another major factor to consider is when you’ll need your money.
Typically, the longer you have to invest, the more you can handle short-term market swings, so you may have a larger allocation to stocks, stock mutual funds or exchange-traded funds. However, when you get closer to needing the money for your goals, we recommend shifting to more conservative investments, such as bonds, CDs or bond funds.
Each of your goals is likely to have a different time horizon. If your goal is retirement, it depends on when you want to retire. If one of your goals is paying for college, however, your time horizon is based on when your children may be going to college and how many years of school you plan to pay for.
Since each goal may have a different time horizon, each one may have its own portfolio objective.
How we can help
You’ve been working for retirement your whole life. Talk to your Edward Jones financial advisor to help make sure you’re on track to reach your goals — and then start living the life you’ve been planning for.
3. Consider your life stage
It’s important to understand how your life stage affects your financial situation. For example, if you’re younger and retirement is a long way off, your investments will probably look different than if you plan to retire in five years.
In the Portfolio Objective Guidance table below, we’ve identified five investing stages of life:
- Three “accumulation” phases for investors saving for retirement
- Two “distribution” phases for those in retirement
Source: Edward Jones
This graphic shows how your tolerance for risk (low, low to medium, medium, medium to high, or high) affects your portfolio objective at various periods in your life, from your early investing years to your later retirement years. So, for example, if you are in your high income and savings years (defined as having 15 years or less until retirement) and have a medium level of risk tolerance, your portfolio objective would likely be “balanced toward growth,” which emphasizes higher long-term growth and rising dividend potential, with a secondary goal of current interest income.
The accumulation stages: Because most investors will spend more than 20 years in retirement, these stages are a critical first step in working toward building wealth and are generally defined as the following:
- Early investing years: When you have 26 years or more until you retire
- Good earnings years: When you have 16 to 25 years until you retire
- High income and savings years: When you have 15 years or less until retirement
The distribution stages: Because your retirement can last about as long as your accumulation years, consider how wealth is distributed during the following two stages in retirement:
- Early retirement years: When you still have 10 years or more to rely on your investments for retirement income
- Late retirement years: When you are age 80 or older and/or expect to spend 10 years or less in retirement
Use the table as a guide to help you determine your unique portfolio objective. First, find your life stage across the top. Then estimate your risk tolerance using the descriptions on the left side. For example, if you’re in your early investing years and have a high risk tolerance, a growth focus may be right for you. If you’re in your late retirement years and have a low risk tolerance, an income focus may be more appropriate.
The following factors can cause you to adjust your portfolio objective from those suggested in the table:
- Current and future income needs
- Amount of existing savings
- Investing time horizon
- Estate considerations
Please note that if you adjust your portfolio objective, it does not mean your risk tolerance has changed.
4. Find the optimal portfolio mix for you
The right portfolio objective for you will address the complete spectrum of your needs as an investor. There are characteristics and trade-offs associated with each of those needs, including risks and returns.
Start with your time horizon and comfort with risk. Next, consider factors such as your income needs, existing savings and your desire to leave a legacy.
Source: Edward Jones
This chart shows the trade-off between risk and return when choosing an investment portfolio objective. In the graph, return is plotted on the y-axis (vertical line), and risk is plotted on the x-axis (horizontal line). Two sample portfolios are shown represented by triangles. One, which is 80 percent income and cash, is plotted at the lower left portion of the graph, and another, which is completely made up of equities, is shown in the upper right area of the graph. The idea is a portfolio mostly focused on income investments will have lower risk and lower returns, but a riskier portfolio made up entirely of equities will have higher risk and higher returns.
In broad terms, you may build an investment portfolio that incorporates elements of income and growth.
A growth-oriented portfolio aims to generate capital appreciation, while an income-oriented portfolio will generate a steady and regular income.
Use these links to learn more about specific portfolio objectives:
- Income Focus (PDF)
- Balanced toward Income (PDF)
- Balanced Growth & Income (PDF)
- Balanced toward Growth (PDF)
- Growth Focus (PDF)
- All-Equity Focus (PDF)
5. Start building your investment portfolio
Once you’ve selected a portfolio objective, you and your financial advisor will work together to build a diversified portfolio with quality investments. This should align with your goals, comfort level with risk, time horizon and other important factors.
You can expect the process to follow the progression of the image below, beginning with the mix between equity and fixed income and moving to the right, where you select the individual investments to build your strategy.
An investment portfolio will generally consist of a mix of asset class investments.
Source: Edward Jones
This graphic walks the reader through the various choices that may be made when building an investment portfolio, beginning with the mix between equity and fixed income and moving to the right, where you select the individual investments to build your strategy. A portfolio is shown as a pyramid with aggressive equity investments at the top (comprising the smallest portion of the portfolio) and fixed income investments at the bottom (income and cash, which make up the latest portion of the portfolio). From left to right, the choices that may be made include investment category (growth or income, for example), asset class (various stock classes, for example), and sector (or maturity for fixed income).
Investment category definitions:
- Cash: The base level of investing includes funds held in savings and money market accounts for investment purposes, but not cash reserved for emergencies.
- Income: Investments such as U.S. and international bonds pay a fixed or variable amount of interest and normally offer higher rates than cash investments.
- Growth and income: U.S. and international large-cap stocks and mutual funds offer potential growth through rising earnings and could provide income through dividends. Prices can vary more day to day than those of income investments, but their dividend income typically provides greater price stability than is generally found in pure growth investments.
- Growth: U.S. small- and mid-cap stocks and mutual funds have the potential to outperform income or growth-and-income investments. But they typically offer little current dividend income and depend heavily on earnings growth for their long-term returns — and their prices can be more volatile.
- Aggressive: These investments may offer higher returns, but they also carry higher levels of risk and price volatility. For example, emerging-markets stocks are highly sensitive to a country’s political and economic events. And though we don’t recommend them, alternative investments also fit in this category.
6. Reach out to your advisor
Your financial advisor can help you build a customized investment portfolio and understand how each component fits into your retirement and other financial goals, asking questions such as:
- When do you want to retire?
- How much money will you need to maintain your current lifestyle?
- Do you want to leave a financial legacy for your heirs? Buy a vacation home?
- What else is important to you?
How Edward Jones can help
As the market shifts over time, your investments may not always be aligned with your original investment mix. And your financial goals or current situation may change. That’s why your financial advisor will work with you to review your portfolio regularly and make any necessary changes.
Talk to your local Edward Jones financial advisor today to begin building a strategy that’s the right fit for you.
Investors should understand the risks involved of owning investments, including interest rate risk, credit risk and market risk. The value of investments fluctuates and investors can lose some or all of their principal.