How to Build a Basic ETF Portfolio
Updated
by Justin Ling
We encourage you to start learning about investments by creating a "portfolio" (a collection of many investments). Leverage a fundamental principle in Investment theory: Diversification and spread your risk in your portfolio across different investments.
We've found that the easiest way for a beginner to achieve a diversified portfolio is to use ETFs.
ETFs [def'n]: Short for "Exchange Traded Fund," an ETF is a single investment that contains many other investments (sometimes thousands). As one ETF represents so many investments, choosing just a few is enough to create a portfolio.
Create your First Portfolio (3 step process):
Step 1: Asset Allocation
You'll want to decide how much of your money you'll keep in Stocks, Bonds, and Cash, depending on your risk tolerance.
Generally speaking, Stocks are the riskiest, then bonds, then cash.
- Stocks [equity]: You fully invest in an investment [security]. You experience their losses and wins.
- Bonds [debt]: You invest in an investment [security], by lending money. This money is to be paid back to you on a future date, and you collect interest payments until then.
- Cash: You hold your money in US dollars. You don't earn any return.
Remember: The higher the return you want to generate, the more risk you need to take, meaning also higher potential losses.
Here's an example of how you might divide your investments (if you're a bit of a risk-taker):
Step 2: ETF Allocation
There are over 7,000 ETFs, so we've made it easier by putting together five basic ETFs. We've chosen three stock ETFs (SPY, EEM, VGK) and two Bond ETFs (IBDN, IEF). These will be the building blocks of your first portfolio.
Now you'll choose the percent weights across each ETF. Use your weightings to reflect your outlook on each investment. We've added some information to help you make the decision:
Performance: indicates the price-trend over the last three months.
Statistics:
- Volatility - This is a measurement of risk. The higher the volatility, the more this company will fluctuate, and the riskier it is. It means you could see more significant gains, but also more significant losses.
- Return - This is the % gain or loss the investment has experienced in the last three months
- Dividend Yield - A dividend is an interest payment for holding a stock for one year. Note: It is not equivalent to your return. If your dividend payment is 1.86%, but the investment loses in value 3%, you will have lost money.
Don't worry if you still don't know what you're doing, try it out and see where it takes you. The purpose of the simulation is for you to learn and make mistakes.
Step 3: Determining how to convert % weights into shares.
Use some basic arithmetic (you might need to pull out a piece of paper and a calculator). We'd recommend using a spreadsheet (excel, google sheets, etc.). If you think you can figure it out on your own, we encourage you to.
We've also built this Google Sheet Calculator to help you out:
