How To Build An Amazing Investment Portfolio

In my journey learning about investing I've come across countless different opinions on how to build the best investment portfolio. The reality is that there is no right or wrong answer. Every individual has their own circumstances, risk appetite, and financial goals.

In this article, I will show you my current portfolio allocation and how I choose to manage my finances. It's important to note of course that this is not financial advice and this may not align with your circumstances or risk appetite. I am not a financial advisor, and you should seek a professional if you need financial advice.

This article is meant to be treated as a guide, and you should always create your own strategy before investing. The stock market carries considerable risk and you may lose money in the event of a market crash.

There are multiple ways to structure a portfolio whether you want to focus on stability if you are closer to retirement or focus on higher growth and don't mind taking more risk. It's also important to focus on the long-term and only invest in companies you are comfortable holding for years. This way the price volatility won't matter as much, making things easier to manage.

I like to have a middle ground strategy, building a solid stable core then adding high growth potential assets on top. For my short-term trades, I like to keep a separate smaller portfolio where I sell options for passive income.

Now, you may ask where do you start, what companies to select and how many of them to invest in. There are different kinds of assets out there, some riskier than others, so it's good to have a solid plan on how you build your portfolio. This is where the fun starts.

Importance of an emergency fund

The main point of an emergency fund is to have a considerable amount of cash available in case you urgently need to access it. Be it that you have lost your job or you have some sort of accident however, those emergencies can happen but you may have also noticed that they don't happen that frequently.

You may already know that other people out there suggest having between 3-6 months worth of living expenses saved up in cash into a bank account, however, I like to think about it slightly differently.

Yes, 6 months is a healthy amount to have should you need them but this doesn't mean that you have to have them locked up in a bank account. We all know that having money in a bank account will slowly depreciate over time due to inflation.

What I do instead is split this amount in two, keep 3 months of cash in the best possible savings account I can find, then put the rest in a general investment account and buy shares of an index fund like S&P 500. Yes, it does take a bit more time to liquidate those funds however it would still be better than having them lose in value.

To add another margin of safety in case I need to spend a large amount of money in a very short amount of time, I also like to have some credit cards available giving me an extra month just in case I need to go liquidate some assets. You should always be careful and pay your balance in full every month to avoid paying large amounts of interest.

My ideal portfolio allocation

Now that we covered the emergency fund, we can start thinking about how to build the portfolio.

10% - Index ETF S&P 500

The first 10% of your portfolio should be put into a long-term index fund like S&P 500. Investing in a broad, diversified fund like the S&P 500 over an extended period of time can yield on average roughly 7-9%.

It is well known that it has been notoriously difficult to beat the market consistently over time. To outperform this index requires a very concentrated portfolio however it also means that you will have a higher degree of risk and volatility.

This slice could also be part of the emergency fund if you need to quickly liquidate some assets.

20% - Big market leaders

For the next 20%, I invest in the big players that dominate the markets. These are the mega-cap corporations with large customers base and large amounts of assets that almost have monopolies in their industry. They have such a large moat that's literally making them untouchable by any competitor.

You already know them. Google, Apple, Microsoft, Amazon... these companies are here to stay no matter what happens in the short term. Owning shares in those businesses will give you great portfolio stability as core holdings.

20% - Property ( REITs or Physical Property )

Property is a really important aspect of building your wealth. It is well known that Real Estate offers great value in a portfolio by offering cash flow and can also act as a hedge of inflation. Real Estate also provides stability by lowering volatility.

Physical property can sometimes be hard to buy at the beginning, not to mention the responsibilities of being a landlord and managing them. One alternative to consider if you are not ready for this side of things is to invest in REITs ( real estate investment trusts ). You can buy and sell REITs just like any other stock. REITs must pay out 90% of their income to investors, so they typically offer higher dividends than many stocks.

It's important to research the tax implications of owning REITs as the dividends they distribute are often regarded and taxed as income. Laws differ depending on the country you're in. I prefer having these into a tax-sheltered account like an ISA in the UK where you don't need to pay any tax for dividends or capital gains tax.

30% - Big growing companies in high growth industries

Now that we covered the first half of the portfolio, the next 30% I would put into large companies that have high growth potential operating in industries that grow fast.

These are the large companies that have the potential to become as big as mega-cap corporations. The key is to look for businesses that still have decent room to grow from an industry that is in rapid expansion relative to the world's economy.

An example of such companies: Disney, Netflix, AMD, Nvidia, Salesforce. These companies are already large, but they are operating in an industry that's continuously expanding.

After the pandemic, more and more people started working from home, offering massive advantages to companies that offered streaming services like Netflix or gaming hardware like AMD and Nvidia, and the list can go on.  

15-20% - Ultra high growth companies

Finally, for the last 20%, we have a choice. We can either invest all of it into ultra high growth companies, or we can put 15% and save the rest of 5% for the next asset which I will reveal shortly.

The ultra high growth companies are usually those small startup businesses that have the potential to disrupt an industry. They are competing with larger players in their industry and they spend all their available cash on innovation in order to grow as fast as possible and be able to outperform the competition.

Due to their speculative performance, investing in those businesses can be very risky however, the returns can be extraordinary.

Companies in this category: Tesla, Fiverr, Pinterest, Enphase, Spotify, SoFi. They all have much bigger competitors in their industry and, due to their aggressive investment in innovation, their products are often the best out there. As more and more people like their products, they have a huge potential to change how entire industries work.

0-5% - Crypto

Yes, crypto. It may not be a surprise, but crypto assets start to get adopted more and more. It's just a matter of time until crypto will be the new norm. For now, it all depends on the level of trust people have in cryptocurrencies.

As of now, it's really hard to tell when is the best time to jump into and the prices are very very volatile, which makes it a very risky asset to hold. This is why it's up to you if you want to invest in crypto and how much. At this point in time, I am slowly building up with small amounts.

The bottom line

This is my overall plan in building my investments and I hope you find it useful as a guide in building your next amazing investment portfolio.

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