This Simple Investment Portfolio Will Save You Time & Make You Tons Of Money

by Gina DiMasi on February 16, 2020 · 2 comments

This Simple Investment Portfolio Will Save You Time & Make You Tons Of Money

Save money, invest said money and repeat. This portfolio strategy is basically that simple and it helps you earn more money and keep that money in your hands. Who wouldn’t want to try out a simple strategy that helps them make more money?

This is the strategy I have been using for the past 6 years. I was taught it when I was an intern at a wealth management firm outside of Boston. These advisors managed portfolios of some of the wealthiest people who resided in Boston and still would tell me that this is the only long-term strategy that will actually benefit my portfolio.

What’s The Strategy?

The strategy consists of some pretty simple principles, they are as follows:

  1. Invest passively.
  2. Never panic.
  3. Always keep taxes in mind.
  4. Diversify.

#1. Invest Passively

Passive investing, also known as the “set it and forget it” method is for investors who are in it for the long haul. Investors who choose the passive approach know to minimize the number of trades that occur inside their portfolio as well as trying to always minimize the cost.

This is opposed to active investing where you are investing in high-cost mutual funds that are run by managers who charge a very high expense ratio.

Note: The expense ratio is the cost of buying that asset. There is a percentage of that total fund that goes towards the managers who make the calls and the analysts who do the research. Of course, the lights, computers and everything else has to get paid for with this as well – hence why expense ratios can get pretty high for funds (and fund managers also are gluttons for a hefty paycheck).

As an example, expense ratios for index funds are commonly 0.4% while expense ratios for actively managed funds average around 1.3%. Over the course of time that your portfolio is invested, you could be losing out on basically a whole 1% of your portfolio. This may not seem like a lot but look at it this way, 1% of $1,000,000 is $10,000. So never think that an expense ratio is something silly because it really adds up over time.

Investing passively means investing in either index funds or ETFs (exchange-traded funds). These are the lowest cost investments meaning they have the lowest expense ratio. Also, another benefit of each of the two is that you won’t be paying a huge tax bill at the end of the year because there is no active manager constantly trading/betting on which stocks to buy. Instead, these two investments are traded very infrequently resulting in a lower tax bill for you.

But what are index funds and ETFs?

Well, an index fund is a bucket of money that tracks a specific index or benchmark. There are so many different kinds of benchmarks to track but some of the most common include the S&P 500 or even gold. An ETF is basically one single share of an index fund whereas when you normally invest in an index fund you have to invest a certain amount of money. An ETF allows you to buy one share of it at whatever the share price is valued at that day.

#2. Never Panic

A bull market, a bear market, whatever the market condition is, it is important to always keep a level head. Keep your eyes on the prize and stay the course.

In a bull market, it is easy to be tricked into thinking that you know exactly what you are doing. Your portfolio is always rising, what could go wrong? But remember, the market falls quicker than it rises.

When the inevitable fall does happen it is important to stay the course. Don’t take all your money out because you’re afraid of losing it. If you made smart investments, to begin with, then they will bounce back in a matter of time.

Understand that you need to be making constant contributions to your portfolio, whether it is a bear or bull market. Don’t think that just because the market is going up like crazy you don’t need to add more. Quite the contrary. You want to harp on those returns.

And the same goes for a down market. If you’re losing money and you think it is best to not invest any more income into the market, you are wrong again. Invest in smart investments to help get your portfolio back on its feet.

All in all, it is important to remember your end goal and never panic. Panicking can be induced by too frequently checking your accounts as well. Especially when you know the state of the market. If you know that you will check your accounts too often and it make take a toll on your mental health, then maybe set a limit to once a week/month. This is completely fine and as part #1 said, this is the set it and forget it strategy so you can quite literally forget about your investments.

#3. Always Keep Taxes In Mind

Taxes are a fickle thing. They are something that cannot be completely avoided… at least not forever. However, there are a lot of fun loopholes that can help you avoid paying huge sums of taxes.

For example, if you invest mainly in tax-advantaged accounts this can help you avoid paying taxes. Tax-advantaged accounts are retirement accounts and they can work one of two ways.

  1. You pay taxes on your contribution to the account and then never pay taxes again (Types of Accounts: Roth IRA, Roth 401k).
  2. You contribute money to your account tax-free but then pay taxes once your withdraw (Types of Accounts: Traditional IRA, Traditional 401k).

Some advisors are quite opinioned on whether one strategy is better than the other however it really depends on the individual. If someone is just starting out investing and they are really young, then investing in a Roth style account would be the better option because they are so young that they will likely be in a lower tax bracket currently then they will be in retirement.

On the flip side, if someone is in the best salary earning years of their life, then it might be time to switch over to a traditional style account and figure out a way to be in a lower tax bracket when you are ready to withdraw that money from the accounts.

Overall, you can’t go completely wrong investing in either of these types of accounts because they are both tax-advantaged. You can go wrong by solely investing in a brokerage account and not utilizing any sort of retirement account.

Note: Another way of investing with taxes in mind is #1. Passive Investing. By not day trading or investing in an active fund where there are hundreds of trades done in that fund in one day, you are avoiding all of the taxes that are tied with capital gains. This is to your benefit entirely.

#4. Diversify

Diversifying is relatively easy. As you near retirement age, you want to have less volatile investment allocations and want to have more cash and solid investments readily available. Diversifying even between different index funds, whether they are international funds, or large/small-cap funds can help ensure your portfolio is evened out. Investing in real estate or REIT (real estate investment trusts) can add another level of security to your portfolio as well because your also investing in a different market (the housing market).

Pro Tip: A quick rule of thumb for how much of your portfolio should be invested in bonds vs. equities is to take your age and subtract it from 110. That is the amount you should be invested in equities and the remaining should go towards bonds.

Know that a key point of diversification is rebalancing. You want to revisit your portfolio once a quarter to see how it performed. Let’s say you started out with 80% S&P 500 Index Funds and 20% Bond Funds but you check back and now your portfolio is leaning more heavily in bond funds, 25% bond funds and 75% index funds, it might be time to shift it back to what your original target goal was.

Summation

Basically, all you have to do is make sure you are investing primarily in tax-advantaged accounts (remember Roth OR Traditional could work best for you), buying index funds (a diversified variety of them) and checking up on your investments a healthy amount. Isn’t it easy? This simple investment portfolio strategy is what the wealthy use to stay wealthy and those who want to be wealthy use to get there.

For some great tutorial videos on why and how to invest passively in index funds, follow the links below: 

{ 2 comments… read them below or add one }

1 Steveark February 16, 2020 at 10:10 pm

Slight correction of a typo, one percent of one million dollars is ten thousand dollars, not one hundred thousand dollars.

2 James Hendrickson February 17, 2020 at 1:08 pm

Steve – good catch, thanks. Made that edit.

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