To achieve our goals and ambitions in life, we need money.
Those goals might be anything — from backpacking across Europe, starting a business, or going to college.
However, saving money requires conscious effort.
Thankfully, that’s where an investment portfolio can help.
An investment portfolio gives you a place to start setting a bit of money aside at regular intervals or on special occasions. Plus, a portfolio enables you to see your financial assets (everything from your checking account to your IRA) and watch your money grow over time.
In this article, we’ll explain what an investment portfolio is and why you need one. We’ll also show you what to consider when creating a portfolio and what it might contain.
An investment portfolio is a collection of financial assets.
It can include things like:
You already have a portfolio, whether you realize it or not.
It’s just that, if you’ve never considered investing, your current asset mix (the diversification of your finances) is probably 100% cash.
The purpose of a well-balanced portfolio is to help you diversify your investments and grow your money over time.
You’ve probably heard the phrase “don’t put all of your eggs in one basket” before.
It’s good to keep this in mind when investing. One asset class that you’re holding may fluctuate in price in the short term. But, by holding a variety of different assets, you can mitigate the effect of those fluctuations — smoothing out most of the volatility.
How you go about doing that is ultimately up to you.
Creating a portfolio is a highly personal process, since it needs to be customized to your own goals and needs.
Some people choose to self-manage their investment portfolio. Others use an investment advisor to help manage their portfolio for them.
EarlyBird, for instance, is a Registered Investment Advisor (RIA) that offers automatically diversified portfolios.
In general, prebuilt portfolios (like the ones EarlyBird offers) are better for the average investor than having to manage everything yourself.
You might not have time to regularly rebalance an investment portfolio on your own or keep up-to-date on the latest financial news.
A prebuilt portfolio is particularly helpful if you’re investing for a child in your life or you don’t have time to constantly monitor your investments.
There might be several concerns that are preventing you from creating an investment portfolio for yourself or somebody that you love:
But the truth is that it’s never been easier to create an investment portfolio.
The days where you had to spend your evenings looking at stock charts and performing your own technical analysis are over. You don’t have to work part-time as a portfolio analyst to get ahead anymore.
You can safely invest in a diversified investment portfolio without having to spend years understanding how stocks or bonds work.
You can also invest small amounts — even $5 or $10 at a time. There are platforms today that will allow you to buy fractional shares of a stock or ETF. That means you can invest as much or as little as you want.
Over the last 20 years, the stock market has been providing approximately a 7% annualized average return.
That average includes periods like the 2008 financial crisis and the dot-com decline in the early 2000s, where the stock market declined significantly.
The truth is, while the value of a portfolio can be volatile in the short term, it tends to go up over time.
The alternative is choosing to only hold cash. In this case, your money is guaranteed to decrease in value by around 2% per year due to inflation. Creating an investment portfolio is one of the few ways that you can get ahead financially.
One survey found that 56% of Americans have $5,000 or less in savings, while a third have $1,000 or less.
When it comes to investing, starting as soon as possible is the key — especially if you’re beginning to invest for a child in your life.
Which is something that EarlyBird can help you with…
Starting at an early age allows you to take advantage of compound interest.
Compound interest is the idea that interest is calculated on both:
Basically, you earn interest on previous interest payments that you’ve received.
So the sooner that you start investing, the sooner your portfolio can grow exponentially.
When you’re thinking about creating an investment portfolio, there are three main factors to consider:
How much are you willing to watch the value of a portfolio go up and down short term?
A more risk-tolerant investor will have the majority of their portfolio in stocks. An investor with lower risk tolerance will invest in less-risky asset classes like bonds.
You need to have a little risk in a portfolio to generate any significant returns. But we’re suggesting that you take on “risky investments.” Most prebuilt portfolios or ETFs aren’t even allowed to hold especially risky investments.
However, any investment you make will come with some level of risk.
Even something like a U.S. Treasury Bond technically has risk associated with it, although the risk is very small.
You just don’t want an investment portfolio to be so risky that you lose sleep over it when there’s a market correction.
When will you need the money?
Is the financial goal to fund your retirement in 30 years or to pay for a child’s college education in 10 years?
Your time horizon plays a part in deciding the risk level of a portfolio as well.
You’re probably willing to invest more in stocks when investing for a child’s future. But if you’re retiring in just a couple of years, you’ll want a more stable and guaranteed source of income.
Diversification is all about the asset mix that you’ll choose for a portfolio.
Based on your risk tolerance and time horizon, you can select the correct assets to include in an investment portfolio.
Don’t worry if it sounds overwhelming. You can get an investment advisor to help you select from several prebuilt portfolios or create your own.
An investment portfolio can include practically any financial instrument or asset that you can think of.
An investment portfolio isn’t necessarily limited to a single investment account, either. It can include the complete “basket” of all the assets that a particular person owns.
That includes things like:
While these items can be included in an investment portfolio, we aren’t specifically recommending any of them here. Some items on this list would exceed the risk tolerance of an average investor.
The types of investment portfolios that you can create are nearly limitless. But here are some broad categories to consider:
1. Aggressive: This kind of portfolio takes large risks with the aim of higher-than-average returns. It includes stocks that fluctuate more than average, as well as more speculative growth stocks, such as smaller startup companies.
2. Defensive: This is the opposite of an aggressive portfolio and is more for somebody who wants to play it safe. The stock portion of this portfolio will normally focus on large, stable companies that perform well even during an economic downturn.
3. Hybrid: A hybrid portfolio seeks to strike a balance somewhere between an aggressive and defensive one. It contains some assets designed for growth and some more stable dividend or interest-yielding assets as well.
For instance, whenever you invest through EarlyBird, we give you a breakdown of the makeup of the portfolio. It looks like this:
4. Income-focused: An income portfolio has some similarities to a defensive portfolio but with even more focus on providing a reliable source of income. Someone who's retired may want a relatively guaranteed amount of dividends and interest coming in each year, regardless of how the market is performing.
5. Socially responsible: This type of portfolio enables you to grow your savings while focusing on ethical and socially-responsible businesses. That way, you’re not only investing in the future of the person that you set up the investment account for but also the world at large.
EarlyBird offers five fixed portfolio types that users can choose from. These range from conservative (100% bond-based ETFs) to aggressive (100% equity-based ETFs). Plus, up to 5% of the account can be optionally allocated to socially responsible companies.
To learn more about the specific portfolios, you can download the EarlyBird app, where everything is explained in detail.
Traditionally, portfolio management is either self-directed or done by a professional portfolio manager.
That means you’re either having to constantly manage the asset allocation yourself or pay several percent to someone else to do it for you.
EarlyBird simplifies the process and handles the details of managing an investment portfolio for you. Minimal input is needed.
We offer those wanting to start a portfolio for a child in their life a fixed portfolio model. You can choose from expertly crafted ETF-based portfolios made up of both securities and bonds.
These are based on the age of the child, your investment goals, time horizon, risk tolerance, and other factors.
Simply select from one of our pre-made portfolio types, and we’ll take care of the rest.
Pricing is simple, too. There’s no setup fee, and your first $200 of assets under management are free. Then, it’s a simple $1 per month subscription fee for each child after that.
For many kinds of investment accounts, you would need to speak with a financial advisor or fill out a lot of paperwork to get started. That’s true whether you’re investing for yourself, a grandchild, a niece or nephew, or anyone else.
This is where things get complicated. You can end up with multiple relatives that each have their own savings account set up for the same child.
If you want to contribute to an existing account that’s under the custody of a parent or other family member, you may not be able to do it directly. So you’ll have to transfer money for them to deposit.
EarlyBird simplifies the whole process by enabling givers to contribute to a single savings account rather than splitting investments. There’s no need to open accounts or fill out paperwork. It’s like Venmo for investing.
An investment portfolio is necessary if you want your wealth to grow over time instead of slowly losing value to inflation.
You can set up an investment portfolio for yourself or for anyone in your life that you love. This could be a grandchild, niece or nephew, or child of a friend.
EarlyBird makes the process of creating a portfolio simple. You can start building wealth for the important people in your life from day one.
Best of all, it allows family and friends to collectively invest in a child’s financial future.
Download the EarlyBird app to see for yourself.