Portfolio Management
September 16, 2021
One key component of an investment strategy is a diversified portfolio. Here are three ways you can kickstart your portfolio no matter your investment style.
A recent study1 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,2time 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 balance3 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.
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 investorexpectations. 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 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.
1Read study at aboutschwab.com/generation-investor-study-2021
2Learn more about risk tolerance at schwab.com/resource-center/insights/content/does-your-risk-tolerance-change-over-time
3See how to assess your appropriate investment balance at schwab.com/public/file/P-778947
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We encourage you to read the Schwab Intelligent Portfolios Solutions™ disclosure brochures for important information, pricing, and disclosures. Before you enroll, it's important you understand any and all costs, including the role of cash and the way Schwab earns income from the cash allocation in your portfolio, which will affect performance and how Schwab and its affiliates work together.
Schwab Intelligent Portfolios® and Schwab Intelligent Portfolios Premium® are made available through Charles Schwab & Co., Inc. ("Schwab"), a dually registered investment advisor and broker-dealer. (Portfolio management services are provided by Charles Schwab Investment Advisory, Inc. ("CSIA"). Schwab and CSIA are subsidiaries of The Charles Schwab Corporation.)
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
Schwab Stock Slices is not intended to be investment advice or a recommendation of any stock. Investing in stocks can be volatile and involves risk, including loss of principal. Consider your individual circ*mstances prior to investing.
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Investors and clients should consider Schwab Equity Ratings as only a single factor in making their investment decision while taking into account the current market environment. Accordingly, Charles Schwab & Co., Inc. ("Schwab") does not assess the suitability (or the potential value) of any particular investment. Schwab also does not provide tax advice and the views in the material do not take into account any client's or investor's tax situation. Clients and investors should consult their tax advisers before investing. Schwab Equity Ratings utilize third-party data in the forming of a rating. While Schwab believes such third-party information is reliable, we do not guarantee its accuracy, timeliness, or completeness.
Schwab Equity Ratings are generally updated weekly, so you should review and consider any recent market or company news before taking any action. Stocks may go down as well as up and investors (including clients) may lose money, including their original investment. Past history is no indication of future performance and returns are not guaranteed. For individualized advice, please contact Schwab at 1 (877) 284-9817.
The Schwab Center for Financial Research may provide research consulting services, such as those related to Schwab Equity Ratings model design and performance, to Schwab investment advisory affiliates for their asset management purposes. Such services are not available to all other clients.
We encourage you to read the Schwab Intelligent Portfolios Solutions™ disclosure brochures for important information, pricing, and disclosures. Before you enroll, it's important you understand any and all costs, including the role of cash and the way Schwab earns income from the cash allocation in your portfolio, which will affect performance, and how Schwab and its affiliates work together.
Schwab Intelligent Portfolios® and Schwab Intelligent Portfolios Premium® are made available through Charles Schwab & Co., Inc. ('Schwab'), a dually registered investment advisor and broker-dealer. [Portfolio management services are provided by Charles Schwab Investment Advisory, Inc. ("CSIA"). Schwab and CSIA are subsidiaries of The Charles Schwab Corporation.]
Schwab Intelligent Portfolios and Schwab Intelligent Portfolios Premium are designed to monitor portfolios on a daily basis and will also automatically rebalance as needed to keep the portfolio consistent with the client's selected risk profile. Trading may not take place daily.
Investing involves risk including loss of principal.
Diversification, automatic investing, and asset allocation strategies do not ensure a profit and do not protect against losses.
Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications, and other factors. Lower rated securities are subject to greater credit risk, default risk, and liquidity risk.
International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging markets may accentuate these risks.
Small cap investments are subject to greater volatility than those in other asset categories.
Diversification, automatic investing, and rebalancing strategies do not ensure a profit and do not protect against losses.
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
©2021 Charles Schwab & Co., Inc. All rights reserved. Member SIPC.
1121-1WEJAs a seasoned financial expert with extensive knowledge in portfolio management and investment strategies, I can delve into the concepts mentioned in the provided article to offer a comprehensive understanding for both novice and experienced investors.
The article discusses "Portfolio Management" and emphasizes the importance of a diversified portfolio in an investment strategy. Diversification is a key principle that I advocate, and it involves spreading investments across different assets to mitigate risk. I'll break down the main concepts highlighted in the article:
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Risk Tolerance and Diversification:
- The article stresses the significance of understanding one's risk tolerance when building a portfolio. Risk tolerance is an investor's ability to withstand fluctuations in the value of their investments. Diversification is then used as a strategy to spread investments across various assets to manage risk effectively.
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Investment Styles:
- Different investors have varying investment styles based on their risk tolerance and goals. The article suggests that conservative investors may opt for low-volatility assets like bonds, CDs, or cash, while those seeking higher growth may include riskier investments in their portfolio.
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Building a Diversified Portfolio:
- The article provides three practical ways to kickstart a diversified portfolio:
- Start with the familiar: Begin with stocks, as they offer growth opportunities. The allocation in stocks can vary based on risk tolerance, with conservative portfolios having a lower stock allocation compared to aggressive ones.
- Fractional shares: Investing in fractional shares allows individuals with limited funds to access expensive stocks, promoting affordability and risk management.
- Use a robo advisor: Robo advisors automate investment decisions based on an individual's goals, time horizon, and risk tolerance. They provide a hands-off approach for those new to investing.
- The article provides three practical ways to kickstart a diversified portfolio:
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Stock Selection:
- The article suggests using tools like a stock screener, such as Schwab Equity Ratings, to assist in selecting stocks. A-rated stocks are considered to have strong potential, while F-rated stocks may underperform.
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Importance of Early Investing:
- Emphasizing the importance of investing early, the article highlights that building long-term wealth requires planning and discipline. Patience is identified as a crucial trait for successful investors.
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Additional Investment Tools:
- The article briefly mentions mutual funds and exchange-traded funds (ETFs) as tools for instant diversification. It also introduces Schwab Stock Slices, allowing investors to build a diversified stock portfolio with small amounts.
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Robo Advisors:
- Robo advisors, such as Schwab Intelligent Portfolios, are discussed as a solution for new investors who may feel overwhelmed. These automated systems build and manage diversified portfolios based on an individual's profile, and they can help mitigate emotional decision-making.
In summary, the article provides valuable insights into portfolio management, emphasizing risk management, diversification, and the use of various tools and strategies to cater to different investor preferences and goals.
