Build Your Portfolio

Learn more about building a portfolio

In order to invest, you need to build a portfolio. A portfolio consists of a series of assets to which funds will be allocated. Those assets can be stocks, bonds, and other financial instruments.

There's no one-size-fits-all strategy when building a portfolio, but there are several formulas that have consistently worked for a number of investment objectives.

We have collected financial data dating back to 1970 and built this portfolio simulator, so you can see how different portfolios and strategies would have performed in a variety of economic conditions. Your answers to the following questions will be used to initialize the simulator parameters.

Start and End Dates

Learn more about the power of time

It's often said that time in the market always beats timing the market. What this means is that investors with long-term goals and good planning are far more likely to succeed than those who try to buy and sell assets at the right time.

With a sufficiently long investment horizon, you don't need to start with a large initial investment to build wealth. In fact, for most people, time is a much more important factor than the amount initially invested! This is thanks to compounding nature of investment returns.

The S&P 500 Index tracks 500 leading U.S. publicly traded companies. Since it's inception in 1993, the tendency of overall growth across a sufficiently diversified number of assets can be observed quite clearly:

S&P 500

Throughout history, both the global and the U.S. economy have consistently experienced significant growth during any sufficient long period of time (at least 10 years). In other words: if you invested in a broad-market index at any point in history for 10+ years, you would have experienced a positive return on your investment (ROI). Even if you invested at the worst possible time right before a recession!

Asset Allocation

Learn more about asset allocation

Of course, there are sometimes long periods of economic stagnation or even contraction. Instead of trying to time the market, you can add different types of assets to your portfolio that will behave differently during those times.

A very common strategy for U.S. investors is the three-fund portfolio. An investor following this strategy simply selects a combination of funds that provide exposure to three main categories: U.S. Bonds, U.S. Stocks and International Stocks.

Stocks are considered more risky, but they also yield a potentially higher reward. More diversified stocks (i.e. international as opposed to U.S. only) tend to be less volatile than their more concentrated counterparts. Lastly, bonds are considered extremely stable but in many cases their return-on-investment can be lower than the inflation rate.

Select your desired asset allocation based on your investment objectives. A larger proportion of stocks is riskier, but likely to outperform other choices in the long term (over 10 years).

Rebalancing Strategy

Learn more about rebalancing

Rebalancing is an extremely important concept when it comes to building a successful portfolio. As time passes and some of the assets in your portfolio outperform others, your portfolio deviates from its intended asset allocation.

Effect of Rebalancing a 80/20 Stocks & Bonds Portfolio

To stay close to the target asset allocation, investors rebalance their portfolio at certain time intervals. More frequent rebalancing does not always yield better results, and unless automated it will also take up a significant amount of time and effort. Select your desired rebalancing strategy.

Dollar-Cost Averaging

Amount of dollars being added to your portfolio at regular intervals.
Learn more about dollar-cost averaging

As you already know, asset values don't go in a straight line. One common strategy to take advantage of market volatility is dollar-cost averaging (DCA). Instead of investing all of your wealth into your portfolio as one lump-sum, you can slowly add the assets to your portfolio at regular intervals. The strategy works like this:

When the markets are up (and potentially overvalued) then $1 will purchase a smaller amount of assets. When the markets are down (and potentially undervalued) then the same $1 will let you acquire more assets.

In many cases, DCA is a strategy that is implemented naturally. For example, this can be done by automatically investing a portion of your paycheck. Another benefit of this strategy is that it allows you to (at least partially) rebalance your portfolio without selling any assets, which provides a great advantage from a tax perspective.

Select your desired DCA strategy. For example, if the initial investment was $200 and you plan on adding $10 monthly, select a monthly schedule and then enter $10.

Investment Risks

Every form of investing has some risks associated it. By educating yourself, you can learn about the different types of risk and make an informed decision that suits your desired risk profile.

Learn more about investment risks

Historical performance is not indicative of future results. Overall economies and markets tend to go up in value, in part due to a (healthy) consistent level of inflation present in all modern market economies. But even broad-market indices go down in value during periods such as recessions.

The difference between the highest historical value of your portfolio and the current value is called drawdown. Riskier strategies might experience a drawdown of over half of the portfolio value in a short period of time. Having a diversity of assets in your portfolio helps minimize those drawdowns and often results in higher overall performance compared to holding a single class of assets, especially when a rebalancing strategy is employed.

2008 Recession Drawdown

During a market downturn, the best thing to do is often to do nothing at all. Of course, this is easier said than done but staying disciplined and sticking to your investment objectives is key to long-term success.