Investing? Start With Your Core Portfolio
By Floyd Saunders, The Author of Five Paths To Wealth, Family Financial Freedom and Figuring Out Wall Street.
Many first time investors want to jump into buying stocks, hoping or perhaps expecting that they can make quick profits from their stock selections, without first building a basic core portfolio that can help protect their investments. You can build a core portfolio with just a few simple exchange traded funds that cover the broad stock and bond markets.
If you think of building an investment portfolio as constructing a pyramid, it has a broad base that forms the foundation for the rest of the structure. If we realize that a pyramid is a very sturdy long lasting structure we look at its foundation as a reason why it stands the test of time over thousands of years. This is what you want for your investments, a strong foundation to start from.
Apply that same idea to building your investments, start with a strong foundation, that is your core portfolio. This is low-cost, good performing stocks and bonds you hold for a lifetime. Your aim here is not to beat the market, but rather match the long-term performance of an index like the S&P 500, a typical benchmark for comparison. The S&P 500 has a record of returning about seven percent over any ten-year period. But you want go a bit more broadly by investing in the total stock market, the total bond market and even a broad international stock market. Preferably with one fund family that provides low-cost, and market matching performance.
They are often low-volatility or passive funds that track major market indices, such as the S&P 500, FTSE All-Share or Global Bonds.
Before you try to invest in the latest startup, which you heard is making a killing on Wall Street, start by being boring: invest in the companies that have been around a while, have been well managed and produce solid returns.
These “every day” types of stocks are not going to make you a killing in the market. But will most likely produce consistent, reliable returns over time.
Your Core Portfolio of holdings should be a collection of companies diversified across sectors and industries. They should be companies that you have heard of, businesses whose products or services you use, and things that you know about. This idea of a Core Portfolio is covered in more detail in Five Paths to Wealth.
The simplest way to do that is with just three exchange-traded funds that give you the opportunity to essentially own the entire stock and bond makets. You can get the broad exposure to investing from Vanguard, iShares or similar companies.
Book cover design by Ashley Dameron
Vanguard
Vanguard is the world’s second-largest provider of exchange-traded funds right behind BlackRock’s iShares. Here it's a simple matter of selecting their broad based index funds, that also just happen to be amount the largest and most popular funds. The list below focuses on funds with balanced performance of steady dividend income and asset appreciation.
The Total Stock Market ETF invests in a wider selection of U.S. market equities across companies of all sizes and market capitalizations. With massive total net assets of more than $780 billion, the Vanguard Total Stock Market ETF comprised more than 3,600 individual holdings so you get the broad diversification that is key to building a core portfolio. The fund is passively managed and remains fully invested at all times.
You are also invested in the many of the best performing stocks (without the need to own those separately including Apple, Microsoft, Amazon, Alphabet and Berkshire Hathaway. These five stocks account for 12.6% of total assets.
Since its formation in 2008, the fund has returned more than 35% on invested assets.
Vanguard Total Bond Market ETF (Ticker: BND)
This Total Bond Market ETF tracks a broad index of US dollar, investment-grade, taxable bonds with maturities of at least one year.holds U.S. Treasury, agency bonds, home mortgage securities, high quality corporate bonds and a few foreign bond that trade in the U.S. BND delivers a massive portfolio of over 10,000 bonds at a low cost. It is also one of the largest bond index funds available with more than $70 Billion in assets. The fund provides the broad coverage of bonds that you want for your core portfolio.
Vanguard Total World Stock ETF (Ticker: VT)
The Total World Stock ETF holds stocks from around the globe including U.S. and Canada, Europe and the UK, Asia and Australia and emerging markets. Both funds hold thousands of securities. track the performance of the FTSE Global All Cap Index, which covers both well-established and still-developing markets. It does repeat many of the same stocks as the Vanguard Total Stock Market ETF, so it may not be necessary to hold both, as you will get some overlap in the shares of companies held, but it does offer international exposure.
IShares
Daniel Prince, Head of iShares product consulting for BlackRock’s U.S. Wealth Advisory Business and U.S. Head of iShares Core ETFs, says that a core portfolio of index can help all investors diversify and build a low risk set of funds as a starting g point for further investing. According to Prince: “The point is that successfully timing the market with individual securities — buying and selling at just the right times — is difficult even for the most experienced investor. Some index ETFs can hold the whole market, a strategy which helps shield investors from sharp declines of a few stocks.”
Here are three of iShares Core ETFs to help you build a low-cost, diversified portfolio.
iShares Core S&P Total U.S. Stock Market ETF (ITOT)
This ETF tracks the S&P Total Market Index, provides low-cost and convenient access to the total U.S. stock market in a single fund, ranging from some of the smallest to largest companies. As an index fund its holding match stocks included in the S&P 500 and the S&P Completion Index. Last year it returned 68.34%.
iShares Core U.S. Aggregate Bond ETF (NYSEArca: AGG)
This ETF tracks the Bloomberg Barclays U.S. Aggregate Bond Index, which tracks the total U.S. investment-grade bond market and can be the part of your core portfolio that to provides both stability and income. Last year it returned 7.43% in a tough market for bonds.
iShares Core Growth Allocation ETF (AOR)
This EFT tracks the S&P Target Risk Growth Index, is a simple way start building a diversified core portfolio focused on growth using one low-cost fund. The fund is composed of a portfolio of nine equity and fixed income funds that represents a growth allocation target risk strategy. Investors can use this ETF to establish a long-term, balanced portfolio.
Robo Advisors
If you are just starting out, you can use a Robo-advisor like Betterment, Wealthfront, Axos Invest or Acorns
to build this core portfolio. Each of these smartphone based apps will select from six or seven ETFs to build an investment portfolio matched to you ability to handle changes in financial markets.
Investigate each of these apps for costs, as they vary sightly in how they charge you for having an account with them.
You can learn more about investing and managing your money to be more financial secure by reading Five Paths to Wealth.
Other books by Floyd Saunders include Family Financial Freedom and Figuring Out Wall Street.
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