Personal assets include stocks, bonds, jewelry, cars, houses, art, crypto, CDs, cash and more, and they require attention to grow. You could get a financial advisor for a hefty fee, or do it yourself.
Managing your own portfolio is a low-effort investment strategy that uses consumer software to buy, sell, and track personal assets based on a fixed allocation plan and fundamental investing concepts and rules.
This article covers what you need to know to get started with a step-by-step guide.
Two Types of Portfolio Management
The first step is determining whether you are (or want to be) an active investor. Most people are not.
Portfolio management is either active or passive. There’s no universal definition for them, but active investing usually involves high-volume day trading to profit from short-term price swings, whereas passive investing involves holding positions for minimum 6 months to profit from overall market growth.
Active investing is concerned with price trends and what other investors are doing, while passive investing focuses on buying assets based on their underlying value. For example, trading stocks from unprofitable but high-profile companies is active whereas holding stocks from profitable but “boring” companies is passive.
If you’re a speculator and have high risk tolerance then active trading could be a good choice. If in doubt, go with passive investing.
Asset Classes (aka Stuff You Own)
The second step is to identify what assets you have (or want to have). The reality is most everyday investors put a minority of their money in stock and bond securities and the rest usually goes to a house, cars, jewelry, and other so-called “alternative” assets.
The point here is to decide which assets are attractive to you. There are two mental tools you can use to decide. The first is how familiar you are with the asset, and the second is its general level of risk.
For example, you might be comfortable with owning and improving houses and comfortable with risk slightly higher than average.
Here’s a list of assets by relative level of risk.
|Forex ❗️||11 (Highest)|
|Commodities (Futures) ❗️||10|
|House (Real estate) ⚠️||9|
|Precious metals ✅||4|
|Certificate of Deposit ✅||2|
|High-Yield Savings Accounts ✅||1 (Lowest)|
Basic Investing Concepts
Investing is mental game as much as it’s a numbers game. To do well, you need to be familiar with core investing concepts. We’ve shortlisted the 7 most cited ones below.
- Diversification. With stocks and bonds, there’s two kinds of choices to make. The first is percent allocation to each one, and the second is deciding which stocks and bonds to buy. Diversification occurs when you own stocks and bonds in different sectors and industries.
- Risk and Return. The possibility of high returns always comes with high risk. Inversely, the possibility of low returns comes with low risk. This is a naturally occurring phenomenon in markets where players always try to maximize returns.
- Risk Tolerance. Risk tolerance is an investor’s desire for high returns. When that desire is strong enough, she or he has a stronger tolerance of the risk that comes with it.
- Compound Interest. The engine of financial growth is compound interest, and it’s not unique to savings accounts. The market produces compound interest because it returns a rough ~8% each year. If you invest $10 in year one, it’s worth $10.80 in year two. Even if you don’t invest more in year two, that amount becomes $11.66 in year three because $10.80 grow by 8% again.
- Inflation. Inflation is the investor’s enemy. It’s the natural decrease in the value of money over time due to growing demand or limited supply of goods both domestically and abroad. With money decreasing in value, investors have strong incentive to place their money today.
- Long-term results. The law of large numbers suggests any statistic or conclusion drawn from a dataset is more reliable the larger the dataset is. For example, imagine a bucket of apples and oranges. If you blindly pull 2 oranges and 1 apple, you conclude the split is 66% and 33%. However, once you count all of the fruit you discover there are actually 80% apples and 20% oranges — your sample was too small and not representative. The same applies to investing. Long-term results predict return better, and the market trend is always up over time.
- Investing vs Retirement Accounts. Investment accounts are fully taxable whereas retirement accounts are tax advantaged. Investors should consult with a tax advisor to ensure they pick the right account for their needs.
- Dollar Cost Averaging. This is a technique in which investors make purchases of the same dollar amount each month or week. The idea is you will buy more stock when the market is low because your fixed amount has a higher purchasing power, and inversely you will purchase less when the market is high because you’ll have lower purchasing power. In the end, you will buy more on the “dips” and less on the “highs” which will create a more profitable portfolio over time.
8 “Rules” to Keep in Mind
These rules apply across the board. Use them to make smart investing decisions.
- Rule of 72. The rule of 72 tells you about how many years it will take to double the principal amount on a compounding-interest position by dividing 72 by the rate of return. For example, let’s assume your stocks have an 8% return. They will likely take 9 years (72 / 8) to double. Neat huh?
- 10, 5, 3 Rule. This rule states that you should assume a return of 10% on stocks, 5% on bonds, and 3% on cash over periods of 10+ years. It’s slightly nuanced and has some additional requirements to work.
- 50, 30, 20 Rule. This is a classic budgeting rule to help you organize your finances. It says you should use 50% of your pay for needs, 30% of your pay for wants, and 20% of your pay for savings or investments.
- 75, 15, 10 Rule. This is an alternative to the previous point. It says you should spend no more than 75% of what you make, invest 15%, and save 10% on the side. In the end, it’s drives 25% of earnings into investment and savings versus only 20% in the previous point.
- 80/20 Rule. The 80/20 rule states that 20% of your work will produce 80% of your results. It’s common to virtually any scenario, and I’ve found it true not only in my personal life but also professionally for company revenues.
- 10% Rule. This is a guide for down payments on significant investments such as houses and cars. It says you should aim to put down no more than 10% of the value of the home.
- $27.40 Rule. I like this one a lot. It’s the amount you would need to save on a daily basis to accumulate $10,000 in savings over one year ($10,000 / 365). You can break it down further for more accessible time frames such as $833/month or $192/week, depending on when you get paid.
- 1% Rule. This is a rental investment rule that says you should only purchase a home to rent out when the monthly rent is equal to 1% of the value of the home. For example, a home listed at $250,000 should rent for at least $2,500/month. Let me be clear that this is extremely challenging to do, but with (a lot of) research, you can find these opportunities.
Tools (Essential & Optional)
If you’re managing your own portfolio, even as a passive investor, you need a set of software tools. These only became reasonably available around 2013, so it’s an opportunity few investors have had historically.
- Online Broker. To execute any kind of trade, you’ll need a broker. We recommend SoFi active or passive invest, but there are loads of options.
- High-Yield Savings Account. Regardless of strategy, you will have some amount of cash in a savings account, so you’ll need to pick a bank with strong yields.
- TreasuryDirect Account. You will more than likely purchase some form of a bond from the US government as part of your strategy, so grab an account.
- Portfolio Management Software (PMS). These are desktop and mobile applications that allow you to track all types of assets, from jewelry to stocks, in one place. They help you quickly see your net worth.
- Mounted Wall Safe. It’s a good idea to have a safe in your home, and ideally one that’s mounted in the wall. This allows you to safely store jewelry and other small assets like gold, designer bags, and small works of art.
- Stock Screeners. Screeners allow you to quickly identify stocks that meet certain criteria such as P/E ration and 52-week low prices.
- Fund Screeners. These work just like stock screeners, but the criteria are different. Typically we’re looking for successful funds with low net expense ratios.
- Trade Routers. Trade routers connect stock screeners with brokers so you can automate trade execution.
- Portfolio Visualizers. Visualizers are similar to PMSs, but they’re focused only on assets with vast underlying data to analyze and visualize, like stocks. There’s not much use in visualizing jewelry because the underlying data doesn’t exist.
Once you understand the basic rules and tools available, it’s time to start working on an approach. I recommend you wait to buy any assets or tools until you’ve gone through the exercise below.
#1 Determine Investment Size
How much money do you want to invest? Do you have savings that you’re investing for the first time? Will you slowly add a portion of your paycheck to an investment account?
The first step is to determine the amount of cash you want to invest in the first year. You can use the rules from above to help guide your decision, namely the 50, 30, 20 rule or the 75, 15, 10 rule. In general, it’s best NOT to purchase lump sums at one time and prefer a balanced approach such as dollar cost averaging (discussed above).
#2 Assess Risk Tolerance
Assess your risk tolerance. Given the amount your plan to invest, how willing are you to lose money in order to gain on it? Keep in mind that aggressive securities can be mitigated via long-term investing. I’m an aggressive investor, so I purchase many stocks. However, I hold them for the long run to mitigate the risk.
If you go long, your risk appetite will change over time as well. That’s OK. Just make sure you maintain best practices with the concepts and rules above.
To help myself understand this I use the classic 5-profile risk framework for stock/bond allocation:
- Conservative – large majority in fixed-income assets like bonds
- Moderately Conservative – majority in fixed-income assets
- Moderate – balance between fixed-income and stocks
- Moderately Aggressive – majority in stocks
- Aggressive – large majority in stocks
#3 Determine Asset Allocation
Once you know your risk profile, you can decide how to allocate your funds across all assets. There is no plug-and-play rule for this. It’s personal. Depending on the assets that interest you and your risk profile you’ll need to set up a strategy that works for you. Here are a few examples, but take them with a grain of salt and for educational purposes only:
These examples show how example portfolios could look like for an investor that wants to incorporate all types of assets. In reality, you may choose only those with which you are comfortable. In addition, you may favor some aggressive assets over others, such as stocks instead of real estate.
#4 Set It and Forget It for 6 Months
Once you determine your asset allocation and with what frequency you’ll contribute your defined amount to each asset, it’s time to download the tools you need (listed above), set up the plan, and forget it. Unless you’re planning to day trade or rapidly purchase and sell assets, the best approach is to set your plan and forget it.
Obviously if you plan an aggressive strategy with 80+% in real estate, this will require more attention up front, but with most liquid assets it’s straightforward.
BONUS: Putting it All Together
Let’s briefly recap with an example. Imagine you decide to invest $5,000 of savings plus $417/month into a portfolio. You already own your home and decide on a moderate strategy given your average tolerance for risk. You would invest a total of $834 each month evenly into bonds, stocks, ETFs, CDs, and HYSAs, plus an account you save in for a car. After one year, you will have an amount towards a car plus a wide portfolio of securities. Pretty cool, right?
You would link your brokerage account to your portfolio management software to track everything in one place. After one year, you’ll be able to track your net worth as it evolves each month, right in one application.
One element we didn’t discuss is liabilities. if you owe money in taxes or use loans to make purchases, these are considered liabilities and will lower your net worth. They’re a normal part of financing assets, so don’t frown upon them by default. From a tracking perspective, yoru PMS will handle these as well, either automated through a linking account or via manual entry.
Managing your own portfolio is a great way to avoid financial advisory fees, build wealth, and become financially literate. With the right strategy, patience, and discipline, you and your family reap the benefits as your money works for you.
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