How to Build an Investment Portfolio from Scratch

Step 1: goal, horizon and risk

A portfolio for retirement in thirty years can hold more stocks than one for a house deposit in four. Also ask how a 30% fall would feel: if you would sell in a panic, a calmer mix is better for you, whatever the textbook says.

Step 2: asset allocation

Asset allocation is the split between stocks, bonds and cash. A higher share of stocks has historically meant higher long-run returns and larger falls. There is no right mix for everyone; a common education example is a stock share that falls as the goal date nears. Treat any rule of thumb as a starting point, not advice.

Step 3: diversify inside the stock part

• Across companies. Dozens of holdings in different sectors reduce the damage of a single failure. A broad ETF does this in one purchase (see ETFs vs stocks).
• Across sectors. Technology, finance, health care, energy and consumer goods do not move together all the time. See the sector mix of the S&P 500 below.
• Across countries. ATLAS covers companies listed in dozens of countries.
• Across time. Investing regularly avoids betting everything on one day.

Step 4: choose a structure

• Core and satellite: broad low-cost funds for most of the money; a smaller part for stocks you have researched.
• Income portfolio: companies that pay dividends. Read dividend yield and traps first.
• Growth portfolio: companies reinvesting for growth, usually with higher valuation and volatility.

Step 5: keep costs low

Fees compound against you as interest compounds for you. A 1% yearly fee over thirty years takes a large share of the final result. Check fund expense ratios and broker commissions.

Step 6: rebalance

Over time winners grow and the mix drifts from your plan. Once or twice a year, or when a part moves more than a set margin, sell some of what grew or direct new contributions to what lagged. Mind the tax consequences in a taxable account.

Test it before risking money

The ATLAS portfolio builder lets you assemble a portfolio and see its risk, and crisis tests show what would have happened in past market falls. Use them to check your plan; they are educational and do not predict the future.