Financial Independence 101: How to Manage your Portfolio

This is a continuation of my Financial Independence blog posts related to financial education. I’m creating the blogs so that our two sons that will be graduating college soon will have a better understanding of personal finance and portfolio management.

Should you Manage your Own Portfolio?

As you begin saving and investing, your total investments will begin to accumulate and compound. This is great, that’s going to build your wealth. When you reach a certain status (maybe it’s after you have $100k invested or maybe even $1m), you will probably begin getting calls from Certified Financial Planners wanting to manage your portfolio.

Is it wise to have them manage it? First, I would like to say that Certified Financial Planners have an incredible amount of knowledge and can be very helpful if you are struggling with specific strategies. Same goes for CPAs. If you can hire them when you need them (for an hourly fee), I would agree that it’s a good idea.

However, most will want to manage your portfolio on a monthly basis and will charge about 1% of your portfolio value for doing this. If your portfolio is worth $1m, it may cost you about $10,000 per year for this service. If you had invested that $10,000 per year for 30 years, you would have given up over $1.2m in gain:

Portfolio - $10,000 per year invested for 30 years

That could be a million dollar mistake. Think about it, who’s got your best financial interests in mind? You or someone else? My guess is you. You work so hard to accumulate the wealth, you should want to know everything you can about personal finance so that you can protect your nest egg.

aMemoryJog - Best Password Manager for iPhone portfolio

How to Manage your Portfolio

Managing your own portfolio is not difficult if you keep it simple. Here are 3 steps that may help.

Step 1 – Invest only in Low-Cost Index Funds

Index funds will diversify your investments with great risk protection. The returns will follow the S&P 500 and it normally produces about 7.5% – 8% per year on average. Open up a Fidelity account and begin contributing money to a few mutual funds. For diversification, I suggest these 4 mutual funds to invest equal amounts in:

  • FUSVX – Invests in S&P 500 stocks (invest 34% here)
  • FSEVX – invests in smaller yet stable companies (invest 33% here)
  • FSIVX – Invests in international stocks, like those in Europe (invest 33% here)

** Note: I have no affiliation with Fidelity nor do I get any compensation, I am just more familiar with their services than other investment companies so that is why I recommend them in this article. You can find similar Vanguard investments.

Step 2 – Add a Bond Fund when you are 5 Years from Retirement

Once you approach retirement age, it will be good to have a bond fund because it will protect your portfolio in years when stocks are not performing well.  Generally, when the economy is booming, stocks do well and bonds produce almost nothing. However, when the economy is in the tank, stock prices fall and bonds do well.

Once you retire, you will need to cash in money to live on, so by having a bond fund, you draw your retirement money from there if the economy is not doing well. When the economy is doing well, you can draw from your stock funds.

So once you are 5 years from retiring, rebalance your portfolio with these allocations:

  • FUSVX – Invests in S&P 500 stocks (invest 25% here)
  • FSEVX – invests in smaller yet stable companies (invest 25% here)
  • FSIVX – Invests in international stocks, like those in Europe (invest 25% here)
  • FSITX – Invests in bonds (invest 25% here)

Step 3 – Rebalance Yearly

As the earnings in your portfolio grow, some of the funds will outperform others. Since you will be reinvesting dividends, you may find at the end of the year that you have more money in one of the funds than others. So it’s a good idea to rebalance your portfolio yearly.

Let’s imagine that at the end of the year you find that FUSVX makes up 30% of your portfolio, FSEVS makes up 20% of your portfolio and FSIVX and FSITX each makes up 25%. In this case, you would simply sell 5% of FUSVX and purchase 5% more of FSEVS, then your portfolio will be balanced once again.

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Read this Financial Book

If you are serious about managing your own finances, I suggest you read a book called “How to Retire Early“. It is written by a friend (Bob Charlton) and in the book he discusses how he and his wife retired at 43 years old. Neither had incredible salaries, they just saved and invested.

The book gives a transparent look into how much they invested each year, what they invested in (they used Vanguard funds similar to the Fidelity funds I suggested above), and how they now manage their portfolio.

More info on the book: http://www.amazon.com/How-To-Retire-Early-Retiring/dp/1482653729

About this Blog

Steve and his wife built a software company, sold it and retired early. Steve enjoys blogging about lifestyle freedom, financial independence and technology. If you like this blog, subscribe here to get an email each time he posts.

If you like this post, you might also like these prior posts:

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** DISCLAIMER ** Financial Information presented on this blog is intended for informational purposes only and is not meant to be taken as financial advice. While all attempts are made to present accurate information, it may not be appropriate for your specific circumstances and information may become outdated over time. Before investing, do your research and seek professional advice.

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