Building an investment portfolio from the ground up can be a daunting task for anyone. There are so many questions that one has to answer before investing their money.
“What is my risk tolerance?” or “How much income do I need?” are some of the first questions that you need to ask yourself before beginning.
Today, I cannot get into the particulars of your specific situation because I don’t know you. However, I can give a broad overview of starting a safe portfolio that also produces a good amount of income.
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From these steps, you will need to tailor the portfolio to your needs based on age, risk tolerance, and desired lifestyle. Maybe I can follow up this article digging into more of these objectives. For now, let’s look at the eight steps to building an investment portfolio.
8 Steps Overview. Let’s look at a quick overview of the eight steps. The good part of being a writer is that I already have deeper articles covering each step to offer more than vague ideas.
- High Yield Savings Account
- Savings Bonds
- Treasury Bonds
- USDC Stable Coin
- Index Funds
- Bond Funds
- Dividend Growth Stocks
- Income Investing
1. High Yield Savings Account (Target Yield 2%). The first step on your investing journey is opening a high yield savings account (HYSA). You can earn an excellent low yield from these safe accounts, plus create an emergency fund. My favorite high-yield saving account is Discover.
2. Saving “I” Bonds (Target Yield 2-5%). The US Treasury offers Savings “I” Bonds which also adjust with inflation. These bonds will do very well as we move into an inflationary period. Even in non-inflationary times, they offer decent yields.
3. Treasury Bonds (Target Yield 3%). Treasury bonds don’t adjust with inflation; however, if you lock in reasonable rates, they will last for 30 years. These bonds do pay you interest to your checking account semi-annually. Thus, you can use them for income.
4. USDC Stable Coin (Target Yield 9%). By far my favorite investment currently. USDC serves a whopping 9% interest yield for a relatively safe investment. If you aren’t comfortable with the crypto-space, I highly recommend learning more about decentralized finance. This opportunity is too good to miss.
5. Index Funds (Target Yield 1.5%). Now we are dipping our toes into the stock market. The best way to invest in passive index funds is by dollar-cost averaging into one of the four central index funds. My favorite is Vanguard Total Stock Market (VTI). Although the yield is low, you should see growth between 7-9% on average.
6. Bond Funds (Target Yields 3-5%) Bonds are a great way to hedge against stocks. However, there are more bond funds than you can imagine. You’ll need to do some research to match your risk tolerance and age. My favorite bond funds are Long-Term Bonds (BLV) and High Yield Bonds (JNK).
7. Dividend Growth Portfolio (Target Yield 4%). Creating a DGI portfolio can seem complicated, but it is not as tough as you think. You pick stable, proven companies and invest in them monthly. That’s pretty much it for DGI. Over time, the dividends and growth from these companies will leave you a nice nest egg that also produces income.
8. Income portfolio (Target Yield 8-10%). My personal favorite part of investing is hunting for high-income securities. Ideally, you would want to generate enough income from this portfolio to fund your retirement completely. Income investing requires a lot of knowledge; thus, it is the last step in the process.
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Use the steps together. You don’t have to follow the steps in order; however, you should understand why they each are vital to the process.
The first four steps can serve as your emergency fund. All the money is accessible, and the prices don’t fluctuate with the stock market.
You decide how much you keep in each account based on your age and risk tolerance. Let’s look at a few examples of an emergency fund by age.
- Age 25: HYSA (10%), Savings Bonds (10%), Bonds (10%), USDC (70%)
- Age 45: HYSA (10%), Savings Bonds (20%), Bonds (20%), USDC (50%)
- Age 45: HYSA (10%), Savings Bonds (30%), Bonds (30%), USDC (30%)
The younger we are, the more risk we can assume. As we age, we can take our profits from our youth and convert them into safer bonds. This is similar to the 60/40 stock to bond rule.
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Investing ratios. The same can go for the bottom four steps. These ratios differ so much from person to person it is not worth giving examples.
However, I will give you a larger view of deciding your allocation percentages. You have to look at your entire income portfolio outside of stocks and bonds.
For example, review your revenue streams if you want to earn $10,000/mo in passive income. Do you have pensions, social security, 401ks, annuities, rental income, royalties, or an automated business?
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Part of the pie. Your investment portfolio is just one part of the pie. If you expect your investment portfolio to cover 80% of your total income throughout retirement, you may need to allocate a high percentage to income investing.
Say that you need to earn $5,000/mo from your investment portfolio. You would need to invest the following amounts to achieve this income.
- Index Funds (1.5%)- $4 million
- Dividend Growth (4%)- $1.5 million
- Income Investing (9%)- $666,667
Once you reach your target from income investing, you may want to build up the other investments in your portfolio. Income investment is for expenses, luxuries, and extras. The index funds and DGI are for generational wealth.
Too much to discuss. The best advice I can give is to read on each topic. You may start investing in random companies or index funds that look attractive.
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Over time, drop each security you buy into a bucket. You’ll become more nuanced as you invest more time and money into your portfolio.
Conclusion. This was an introduction to creating an investment portfolio. This is only my take and what I have been doing for the last three years.
I didn’t begin with this knowledge. I started with a high-yield savings account and a DGI portfolio. Over time, I gathered more education and traveled down different avenues.
I always wanted to protect my capital, but my yields increased significantly by taking some risk in income investing. Now, I aim to reach my target income and add more index funds, DGI stocks, and USDC.
Focus on the first four steps if you are on the fence about investing. They don’t involve the stock market, and they offer low risk with a decent rate of return. You can’t ask for more!
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing
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