How To Build Your Core Portfolio

If you’re new to investing, learning how to start your investment portfolio might be intimidating. There are so many different financial terms, accounts, and investment types that it can be hard to know where to start. 

The good news is that learning how to manage your own investment portfolio isn’t as challenging as you might think.

By taking it one step at a time, you can absolutely learn how to develop your own core investment strategy.

Erika Taught Me

  • Diversifying your portfolio with a mix of assets, like stocks, bonds, and cash, helps to spread out your investment risk.
  • Consider your goals, risk tolerance, and time horizon when deciding which assets to invest in.
  • You can put your assets into a tax-advantaged account like a 401(k) or IRA, as well as into a separate brokerage account.

. . .

What Is a Core Portfolio?

Your core portfolio is the basis of your portfolio. It’s a mix of assets that make up your long-term investments that will ideally carry you through all the way to retirement. 

The key phrase is “mix” of investments, also called diversifying. 

Diversifying your portfolio helps to spread out your investment risk. Having a mixture of investments like stocks, bonds, and cash is more stable than having all of your money tied up in one stock, for example.

6 Steps in Planning a Portfolio

There are several steps in planning a portfolio. Although it might take some time to complete them, it’s worth it to feel secure in your future.

Step 1: Set your investment goals

The best way to start improving your finances is to sit down and write out your money goals. 

It’s important to think about your goals before you even research investments. 

Whether you want to pay off high-interest debt, buy a vacation home, or pay for your children’s college education, writing down your goals gives you purpose and can help motivate you.

READ MORE: How To Set Your Investment Goals

Step 2: Know your time horizon

Your time horizon is the amount of time your investments have to grow before you need to access them. 

If you’re young and in your 20s, you have a long time horizon. If you’re building your portfolio a little later in life, your time horizon will be shorter. 

Your time horizon can help you determine how much you need to invest to reach your goals.

Step 3: Know your risk tolerance

Your risk tolerance measures how willing you are to lose money on an investment. There are three types of risk portfolios: aggressive, moderate, and conservative.

In general, an aggressive portfolio is for investors who have a high risk tolerance. These are usually young investors who have a long time before retirement. 

An aggressive portfolio would have a majority of stocks and only a small percentage of bonds. 

Compare that to a conservative portfolio, which is low-risk and ideal for risk-averse investors, like those close to retirement. 

A conservative portfolio might have cash and more bonds than stocks.

Step 4: Choose your investment accounts

There are several different types of investment accounts, each suitable for specific situations.

Here are the most common accounts and which type of investor they'd be best for.

IRA or 401(k)

The main way that most people invest for retirement is through a tax-advantaged retirement account — either a 401(k) or an individual retirement account (IRA). 

A 401(k) is an employer-sponsored retirement account, which often includes the employer matching your investments up to a certain percentage. 

If you have a 401(k) with a match available to you, that's a good place to start investing because you get free money on top of your own investments.  

With IRAs, there are two types: traditional and Roth. The main difference between the two is when you pay taxes on your investments. Do your research to determine which of these accounts would be best for your personal situation.

Brokerage accounts

Once you've maxed out your tax-advantaged retirement accounts, the next step is to invest in a brokerage account. 

These don't have tax advantages like the retirement accounts mentioned above, however, there are no limits on the amount of money you can invest and no restrictions on the age you have to be to withdraw money.

You can open a brokerage account with an advisor who manages your investments for you, or you can opt for a robo-advisor, which is an algorithm that tailors your investments to your risk tolerance and situation. Robo-advisors also tend to be more affordable. 

You can also fully manage your portfolio yourself through an investing app like Webull or Robinhood. It all depends on how hands-on you want to be with your investments. Some apps, like Webull, also offer robo-advisor services.

Other accounts

You should also open at least one interest-earning account, where you put your cash savings. 

Money market accounts, certificates of deposit (CDs), and high-yield savings accounts are all accounts you can use to earn interest on your money, without putting it into the stock market. 

Since these types of accounts are more conservative, they have lower earning potential than stocks but are still worth using as part of your diversification strategy.

Step 5: Choose your investments

Once you've decided on the type of account you want, you have to decide on the type of Investments you want inside of it. 

Here are some of the most common types of Investments you can purchase for your investment accounts. 

Stocks

Stocks represent a percentage of a company. When you buy a stock, you are buying a small amount of ownership in a company. 

Buying an individual stock is considered a riskier investment because you are placing your money on a chance that the company you invest in will grow.

Bonds

Bonds are loans that investors give to a government or corporation. 

Bonds pay a fixed interest over time and are less volatile and more conservative than buying stocks. For that reason, they have lower earning rates.

Investment funds

Buying mutual funds, index funds, and exchange-traded funds (ETFs) is considered less risky than buying individual stocks. 

With a fund, rather than purchasing a portion of an individual company, you are purchasing a basket of a bunch of companies. 

Because of that, the fund is naturally diversified. If one company does poorly and the others do well, your investment will not be as negatively affected as it would be if all of your money were in a single company.

Real estate

Many people own homes and count that as part of their net worth and overall portfolio. 

You could also purchase a second home or investment home that you rent out for income, as another path to growing your wealth over time.

Cash equivalents

Finally, there are cash equivalents like putting money in a savings account or a CD. These investments are good for short-term goals, like saving for a vacation or a new car. 

These accounts earn interest, although not as much as other investment types. However, you don't have the risk of losing your investment.

Alternative investments (high-risk)

Alternative investments such as gold, fine art, wine, and cryptocurrency are considered high-risk investments. 

These should only be a part of your portfolio if you are extremely knowledgeable about a particular type of investment and understand that you have the potential to lose your investment.

Step 6: Determine your asset allocation

Once you have familiarized yourself with the different types of assets available, decide how you want to allocate your assets inside of your portfolio. 

Allocation refers to the different types of assets you include and should be based on your risk tolerance.

For example, a more aggressive investor will allocate more of their money to stocks instead of bonds.

How To Manage Your Core Portfolio

Building a balanced investment portfolio takes time and planning — because once you’ve purchased your investments, you’ll then need to manage them!

Review your portfolio regularly to ensure you’re still on track to meet your goals. That could be monthly, quarterly, or annually. When you review, consider the ratio of stocks, bonds, and other assets — do they still match your risk tolerance and time horizon or do you need to rebalance

You can track your investments manually or use tools like Empower to look at your finances and net worth as a whole.

Passive vs. active portfolio management

There are two main styles of investing: passive and active. 

With passive investing, you invest in things like index funds or ETFs, which mimic a specific index, like the S&P 500. You also hold onto your investments for the long term, rather than trying to time the market by regularly selling and buying stocks.

With active investing, you try to beat the market by frequently trading. Rather than tracking an index, you’re trying to find and buy stocks that are earning higher than the average market rate.

Active investing advertises higher returns because an investment advisor actively chooses the investments in the funds — but it’s just that, an ad. Data reported by the New York Times shows that passive investing with index funds performs better than actively managed funds.

Since your core portfolio is what you want to hold onto for the long term, you don’t want to load it up with risky stocks that require lots of tracking and trading. Those are fine for some additional investing on the side, but just like your gym instructor says, you want your core to be stable.

READ MORE: Active vs. Passive Investing: Which Is Best?

FAQs

How many stocks should I own as a beginner?

As a beginner, investing in an index fund, which is a collection of stocks, is a good way to get started, since it’s already inherently diversified. 

For beginners, this is a more straightforward investing route than trying to choose an individual company stock.

What is the safest investment with the highest return?

The safety of an investment is relative, as some people have a higher risk tolerance than others. And no investment is entirely risk-free.

That said, investing in bonds and putting your money in a high-yield savings account are two safe investments because you have guaranteed returns. However, the earning rates are typically lower than what you’d get with an index fund or stocks. 

What percentage of your income should you invest?

Deciding how much of your income to invest is a personal choice. There’s a rule of thumb of 15% of your income, but that percentage may vary depending on your stage of life and where you live. 

For example, if you have young children and high daycare costs, you might not be able to invest as much as someone at a different stage in life.

Ultimately, a good goal is to practice investing consistently each month and increase the percentage of your income you invest over time.

Who do I ask for help with building a core portfolio if I need it?

If you decide to seek out a financial advisor, look for one who is a Certified Financial Planner (CFP) and a fiduciary, meaning they’re required by law to make decisions in your best interest — not theirs.

TL;DR

Your core portfolio is just that: the core of your investments. You want it to be a mix of assets that you can hold onto for the long term, and might include stocks, bonds, cash, and even real estate.

With your core, you want to keep it stable. Some risk is good, and you may even decide to invest in some riskier stocks to see about earning bonus returns, but you don’t want to bet your entire retirement solely on investments that might go way up — but could also go way down.  

For more investing advice, check out these episodes of the Erika Taught Me podcast:

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I'm an award-winning lawyer and personal finance expert featured in Inc. Magazine, CNBC, the Today Show, Business Insider and more. My mission is to make personal finance accessible for everyone. As the largest financial influencer in the world, I'm connected to a community of over 20 million followers across TikTok, Instagram, YouTube, Facebook and Twitter. I'm also the host of the podcast Erika Taught Me. You might recognize me from my viral tagline, "I read the fine print so you don't have to!"

I'm a graduate of Georgetown Law, where I founded the Georgetown Law Entrepreneurship Club, and the University of Notre Dame. I discovered my passion for personal finance after realizing I was drowning in over $200,000 of student debt and needed to take action-ultimately paying off my student loans in under 2 years. I then spent years as a corporate lawyer representing Fortune 500 companies, but I quit because I realized I wanted to have an impact; I wanted to help real people and teach them that you can create a financial future for yourself.

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Our aim is to help you make financial decisions with confidence through our objective article content and reviews. Erika.com is part of an affiliate sales network and receives compensation for sending traffic to partner sites, such as MileValue.com. This compensation may impact how and where links appear on this site. This site does not include all financial companies or all available financial offers. This in no way affects our recommendations or article content.

Advertiser Disclosure

Our aim is to help you make financial decisions with confidence through our objective article content and reviews. Erika.com is part of an affiliate sales network and receives compensation for sending traffic to partner sites, such as MileValue.com. This compensation may impact how and where links appear on this site. This site does not include all financial companies or all available financial offers. This in no way affects our recommendations or article content.

Advertiser Disclosure

Our aim is to help you make financial decisions with confidence through our objective article content and reviews. Erika.com is part of an affiliate sales network and receives compensation for sending traffic to partner sites, such as MileValue.com. This compensation may impact how and where links appear on this site. This site does not include all financial companies or all available financial offers. This in no way affects our recommendations or article content.