Building Your Portfolio

“I think for most investors, dollar-cost averaging into a low-cost index fund will provide the highest odds of long-term success.” – Morgan Housel
Man checking investments progress on phone

Your Portfolio

  • Make sure your asset mix (e.g., stocks, bonds, and short-term investments) is aligned to your investment time frame, financial needs, and comfort with volatility.
  • It is important to understand and remember that the function of bonds/fixed income investments in your portfolio is to lower volatility and provide cash flow, not to make you rich.
  • Questions to consider when settling on an appropriate asset allocation for your TSP:
    • How much will my retirement lifestyle cost?
    • What will be my different sources of income in retirement (e.g., pension, Social Security, TSP, IRA(s), taxable investments)?
    • How much time do I have to save what I’ll need?

Show More

  • Generally speaking, the longer your time horizon, the more aggressive you can be with your investments.
  • A reasonable starting point (for stock / bond allocation) may be:
    • Mid-20s to Mid-30s: 80 / 20
    • Mid-30s to Mid-40s: 70 / 30
    • Mid-40s to Mid-50s: 60 / 40
    • Mid-50s to Mid-60s: 50 / 50
    • Mid-60s+: 40 / 60
  • Successful investors do not let volatility scare them out of stocks. Instead, they learn to accept a level of portfolio risk and volatility that is appropriate for their financial goals, time horizon, and risk tolerance. They understand the link between risk and expected return and let time smooth out short-term volatility. They do not attempt to avoid drawdowns; they learn to outlast them.” – George Sisti

At the end of the day, remember, “Asset allocation is critically important; but cost is critically important, too – All other factors pale into insignificance. Choose a balance of stocks and bonds according to your unique circumstances – your investment objective, your time horizon, your level of comfort with risk, and your financial resources. Absolutely no one knows what the stock market is going to do tomorrow, let alone next year. Nor which sector, style or region will lead and which will lag. Given this absolute uncertainty, the most logical strategy is to invest as broadly as possible.” – Jack Bogle

Rebalancing Your Portfolio

  • Rebalancing refers to bringing a portfolio that has deviated from one’s target asset allocation back into line. Personally, I rebalance annually.
  • The objective is to maintain a consistent mix of asset classes (most commonly, equities vs. fixed income) in order to control/manage risk. This is accomplished by transferring funds from higher-performing to lower-performing classes.
  • While potentially counterintuitive, rebalancing ensures that investors “buy low” and “sell high.”
  • You’ll always know what to buy – funds that have underperformed since the last rebalance. You’ll always know what to sell – funds that have outperformed since the last rebalance. No guessing is necessary.
  • If you don’t rebalance, a run in stocks could leave your portfolio with a risk level that is inconsistent with your goals.
Happy broker looking at laptop screen showing stocks