Portfolio Management | September 16, 2021

3 Ways to Kickstart Your Portfolio

A recent study found that most new investors were surprised to learn that investing is more about long-term, rather than short-term wins. So, how do you position yourself for long-term success? Start by building a diversified portfolio based on your risk tolerance, time frame, and how involved you want to be in managing your investments.

Diversification helps spread your money across different assets, just in case one of your investments doesn't perform as well as you thought it would. Your risk tolerance is generally your comfort level to withstand wide fluctuations with your investment's value (volatility)—not all investments go up or down in value in the same way.

If your tolerance for risk is low, meaning it's hard for you to stomach large swings in value, you'll probably want to build a conservative portfolio, balancing your stock investments with buying more no- or low-volatility assets like bonds, CDs, or cash. On the other hand, if long-term, higher growth is your goal, you might be able to afford—literally and figuratively—to stack your portfolio with riskier investments because of greater potential opportunity to recover your losses.

If you're unsure of your investment style, you can assess your appropriate investment balance by answering a few simple questions about your risk tolerance and time horizon to develop an investment strategy. However, be careful about making your assessment when the markets are up. Good markets tend to give people a false sense of confidence to take on greater risk than they're really comfortable with. Once you know your risk tolerance, here are three ways to kickstart your diversified portfolio.

1. Start with the familiar

Most newer investors are familiar with stocks, so consider starting there. Stocks, or equities, represent a share of ownership in a company. Because their value generally hinges on the performance of the business, they tend to offer a greater opportunity for growth in your portfolio—unlike fixed income and cash investments that can help provide more reliable, steady returns. 

The trade-off is that, as much as stocks have the potential to produce bigger profits, earnings aren't guaranteed, and you may even lose money. Regardless, even the most conservative investor would likely want to allocate a portion of their portfolio to stocks. In our model portfolios below, a conservative allocation invests 20% in stocks whereas an aggressive portfolio consists of 95% stocks.

A conservative portfolio is 50% fixed income, 30% cash, 15% large cap, and 5% international. A moderate one has 35% in both fixed income and large cap, 15% international, 10% small cap, and 5% cash. An aggressive approach is 50% large cap, 25% international, 20% small cap, and 5% cash.

Source: Schwab Center for Financial Research. All models presented are hypothetical, are for illustrative purposes only, and cannot be invested in directly. Models are shown at the asset group level and not intended to represent a specific investment product.

To select stocks that can help you achieve your long-term investment goals, one component you can use is a stock screener like Schwab Equity Ratings® to help take out some of the guesswork. Schwab Equity Ratings ranks approximately 3,000 U.S.-traded stocks on a scale from A to F based upon a disciplined, systematic approach that seeks to gauge investor expectations. Schwab's research outlook is that A-rated stocks are worth considering because they're expected to strongly outperform the equities market during the next 12 months. F-rated stocks, on the other hand, are predicted to strongly underperform, and you should consider not buying them or—if they're currently in your portfolio—selling them.

Mutual funds and exchange-traded funds (ETFs) are another way to help build instant diversification because they bundle individual securities into one fund. However, you'll still need to monitor and adjust your portfolio on an ongoing basis according to your risk tolerance and time horizon. 

2. Spend a little and learn a lot with fractional shares

When you have a limited amount to invest, buying a whole share—let alone multiple shares—of a stock can seem out of reach. Fractional shares allow you to purchase a piece, or slice, of a share at a price you can afford. 

Fractional shares work the same as whole shares except you'll earn or lose the proportional amount relative to your holdings. Let's say you want to buy stock in a specific company whose price is $1,000 a share. You only have $100 to invest, so you purchase a 10% fractional share. If the price of the stock goes up to $1,150 (an increase of 15%), your fractional share will be worth $115—a gain of $15. If the price per share drops 25%, instead of losing $250, your loss is $25 in a fractional share.

The proportion of the amount you lose or gain will always be 10% of the stock’s value no matter how much the price decreases or increases. If the stock price is $750, your 10% fractional share will be worth $75. If a whole share goes up to $1,150, the value of your slice will be $115.

The example is hypothetical and provided for illustrative purposes only.

Be aware that fractional shares of every stock listed in the market may not be available for purchase. For example, Schwab Stock Slices™ allows you to invest in companies in the S&P 500® companies to start building a diversified stock portfolio for as little as $5 a slice. 

3. Use a robo-advisor to do the heavy lifting

If you're new to investing, you can easily become overwhelmed by all the investment choices out there, or you might be tempted to act on your feelings instead of trusting the research. A robo-advisor can help make some of those difficult decisions for you. 

Automated investing doesn't make a lot of demands on your time or attention. After you identify your goals, time horizon, and risk tolerance, a robo-advisor will build a diversified portfolio based on your investor profile. For example, Schwab Intelligent Portfolios® assembles a mix of ETFs, along with a cash allocation, selected by our experts. It then monitors market activity and automatically rebalances your allocations to keep your investments aligned with your goals.

Although most of the work is done through sophisticated algorithms, you still have the option to contribute funds as you see fit. The robo-advisor may even alert you if you're falling short of your goals so you can take action.

For new investors, reacting to changing market conditions can be an emotional and costly decision. It's not always easy to keep a cool head if markets go haywire. A robo-advisor is a way to invest while limiting the impact your emotions can have on your portfolio.

Investing early is key

Building long-term wealth should drive your investment strategy. That's why the earlier you start planning for the future, the better. Even small dollar amounts can grow if you remain disciplined and steadfast. Remember that achieving your goal takes time. Patience isn't just a virtue—it's often a crucial character trait of successful investors.

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