How to Personalize Your Portfolio
The most important thing when trying to personalize a portfolio is knowing yourself and what you want to accomplish with investing. Firstly, what are your goals? Do you want to buy a home in the coming years? Are you looking to build long-term wealth or retire? This is an important thing to ponder so that you know how much risk is acceptable.
Additionally, you need to know the time frame in which you want to operate. Want to do a short-term investment? Then stick to safer options such as bonds. Planning to invest for 10 years or more? Then you can take more risk and dive into stocks.
Outside of simply your goals, you need to also know how much risk you as a person are willing to take. It's not easy to watch your investments plummet when the time arises. Are you going to be able to keep a level head? Or are you more of a risk-averse person who would rather play things safe?
What are your values? It might seem like a silly question, but if you have a strong passion for sustainability, there are numerous ethical ETFs available that adhere to strict ethical and sustainable standards.
Once you've found yourself, it's time to find the investments and allocation that complement you. If you're more risk tolerant, then you might consider a heavier stock-to-bond portfolio, but if you're more risk averse, then dialing things back may be better for you.
Risk Tolerance Quiz
Case Study: Meet Dan
It’s difficult to find your risk tolerance, and occasionally, you don’t truly know it until you're under pressure. So let’s walk through a case study and meet Dan, a 24-year-old who just landed a job as a financial analyst, earning $85,000 per year.
Dan’s goal is to retire early and ensure his future children live comfortably. With that in mind, he builds a highly aggressive portfolio made up entirely of VOO, an ETF that mirrors the S&P 500.
Dan commits 30% of his income—about $25,500 per year—to VOO, earning an average annual return of 8%. After 10 years, Dan is just 34 years old and already has a portfolio worth $454,000. Impressive, right? Though he had to sacrifice some spending in his 20s, he's now seeing the payoff.
Now a father of two, Dan wants to prepare for his children’s future. He adjusts his portfolio to 60% stocks and 40% bonds. But soon, the economy takes a downturn, slipping into a recession. His investments decline sharply. Dan is tempted to sell, fearing he’ll lose everything—but he holds firm.
Two years later, the market recovers. Dan’s portfolio bounces back, and he continues contributing annually. As he approaches retirement, Dan gradually shifts his allocation more conservatively, eventually reaching a fully bond-based portfolio by the time he retires.
Takeaways
We can take a lot away from Dan's story. Firstly, Dan emphasizes the significance of initiating early and demonstrating aggressiveness in his youth. Although Dan did admittedly get lucky that there was no economic downturn in his younger years, he would have still had the time and ability to adapt if one did occur.
Moreover, by the time one did occur, Dan stood firm despite the economic downturn, and he knew that he had the time to ride it out rather than panic selling and succumbing to substantial losses.
Finally, as Dan grew older, he knew his ability and, more importantly, time to take on risk were diminishing, so he transitioned to a safer bond-focused portfolio.