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Building An Investment Portfolio

March 03, 2021 · 6 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

Building An Investment Portfolio

Before you start pondering what you want to invest in, think this through first: Why am I investing? In the end, most of what matters is achieving your financial goals. What are you saving for? Start there but don’t move forward until you have solid answers because it will help you determine how to invest.

Matching your goals with your investment strategy is important if you want to give yourself a shot at the outcome you want.

Below is some background on popular investing trends in the U.S., as well as ways to think about long-term vs. short-term financial goals and handling investing risks.

America’s Favorite Investments

Stocks regained their status as a avorite long-term investment in the U.S., according to a survey conducted in 2020. Real estate, the top investing preference in prior years, was a close second.

However, the figures differed when the group surveyed was broken up by age. Younger millennial investors (ages 24-30) favored real estate over stocks, while older millennials (31-39) showed among the highest preferences for stocks and among the lowest for real estate.

When you think about it, it’s understandable. Millennials came of age during the 2008 financial crisis and many are completely saddled with student loan debt. The same survey found that 1 in 4 millennials said that the Covid-19 pandemic would prompt them to invest more aggressively over the long term–a higher percentage than in other age groups.

So a lot has been thrown the way of millennials, and some may feel more comfortable being conservative, while others may seek riskier assets like the stock market as their only avenue for growth-oriented investments.

Whatever your preference is, here’s a closer look at how you can dive into building an investment portfolio.

Short-Term vs. Long-Term Financial Goals

Your relationship with money and investing may change as you get older and your circumstances evolve. As this happens, it’s best to understand your goals and figure out ahead of time how to meet them. Long- and short-term goals depend on where you are in life.

If you’re still a beginner investing in your 20s, you’re in luck. Time is on your side, and when building an investment portfolio, you have that time to make mistakes (and correct them).

You can also potentially afford to take more risks, because you’ll have more time to work on reversing losses, or at least shrugging them off and moving on.

If you’re older and you’re closer to retirement age, you can reconfigure your investments so that your risks are lowered and your investments become more conservative, more predictable, and less prone to large drops in value.
As you go through life, consider creating short and long-term goal timelines. If you keep them flexible, you can always change them as needed. But of course, you’d want to regularly check on them and the big financial picture they’re helping you create.

Short Term: Starting an Emergency Fund

Before you do any serious investing, making sure you have enough money stashed away for emergencies is a good idea. Loss of income, unplanned moves, health situations, auto repairs, and all of those other surprises can tap you on the shoulder at the worst possible time—and that’s when your emergency fund comes in.

For short-term expenses, it may make sense to keep your emergency money in liquid assets. Liquidity helps ensure that you can get at your money if and when you need it. Try not to take too many risks with emergency money, because you may not have time to recover if the market experiences a severe downturn.

Long Term: Starting a Retirement Fund

Think about what age you would want to retire, and how much money you think you would need to live on year to year. You can use our retirement calculator to get a better idea.

One of the most frequently recommended strategies for long-term retirement savings is opening a 401(k), an IRA, or both. The benefit of this type of investment account is that they have tax advantages.

Another benefit of 401(k)s and IRAs is that they help you build an investment portfolio over the course of decades: the long term.

Prioritizing Diversification

Portfolio diversification means keeping your money in more than one place: think stocks, bonds, and real estate. And once you diversify into those asset classes, you’ll need to drill down and diversify again, within each sector.

Understanding Systematic Risk

Big things happen, like economic uncertainty and war. These incidents will affect almost all businesses, industries, and economies. There’s not many places to hide during these events, so they’ll likely affect your investments too.

One smart way to fight this: diversify. Spread out. High-quality bonds, like U.S. Treasuries, tend to do well in these environments and have offset some of the negative performances that stocks usually suffer during these times.

It might also be helpful to calculate your portfolio’s beta, the systemic risk that can’t be diversified away. This can be done by measuring how sensitive your portfolio is to broader swings in the market.

Understanding Idiosyncratic Risk

Smaller things happen. This risk is more micro than macro; they may occur in a specific company or industry. For instance, a scandal could rock a business, or a tech disruption could make a certain business suddenly obsolete.

As a result, stock value could fall, along with the strength of your investment portfolio. The best way to fight this: diversify. Spread out. If you only invest in three companies and one goes under, that’s a big risk. If you invest in 1,000 companies and one goes under, not so much.

Owning a lot of different assets that act differently in various environments can help smooth your investment journey, reduce your risk, and hopefully allow you to stick with your strategy and reach your goals.

How Much Risk Can You Handle?

When it comes to braving risk, everyone is different. And in life, there are no guarantees. So where does that leave you? Take your risk temperature and see which type of investing you can live (and grow) with. Below are two general strategies that many investors follow.

Aggressive Investing

This is for the investor who wants to take risks to grow their money as much as possible. The idea here is to “go for it.” Find investments that feel like they have a lot of potential to generate large gains. High risk sometimes means big losses (but not always).

Your stock picks can ride the rollercoaster, and if you opt for an aggressive investing strategy when you’re young and just starting out, you can watch them take the ride without you doing much hand-wringing.

If it doesn’t work out, you can own the loss and move on. Downturns happen. So do bull markets. And when you’re young, you can likely afford to take risks.

Conservative Investing

This is for the investor who is worried about losing a lot of their money. It may be better suited for older investors, because the closer you get to your ultimate goal, the less room you are going to have for big drawdowns in your portfolio should the market sell-off.

As you inch closer to your finish line, you can prioritize lower-risk investments. Research investments with more stable and conservative returns. Lower-risk investments can include fixed-income (bonds) and money-market accounts.

These investments may not have the same return-generating potential as high-risk stocks, but often the most important goal is to not lose money.

Paying Off Debt

Student loans and credit card debt are surely going to stand in the way of your pumping money into your investment portfolio. Do what you can to pay off most or all of your debt, especially high-interest debt.
Get an aggressive repayment plan going. Also, remember it can be smart to pay yourself first (by that, we mean to keep a steady flow of cash flowing into your short and long-term investments before you pay anything else).

The Takeaway

Building an investment portfolio is a process that depends on where a person is in their life as well as their financial goals. But every individual should think about long-term and short-term investments, as well as the importance of portfolio diversification.

These are big decisions to make. Sometimes you may need another voice to help you understand what you don’t know.
At SoFi, members can meet with a CERTIFIED FINANCIAL PLANNERTM (CFP®) who can help them with their decisions on investing. For those who want a portfolio built for them, SoFi’s Automated Investing platform may be a good option. Investors who want to pick and choose stocks, exchange-traded funds (ETFs) and fractional shares themselves can try the Active Investing product.

Get started with SoFi Invest.

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
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Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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