3 Types of Portfolios for Passive and Active Investors
“Infinite” is an appropriate word to describe the number of portfolios (aka a mix of investments) out there. Thousands of types of portfolios exist, as well as many different allocations and ETFs. So how do you choose the best one for you?
We’ve got you covered. Check out the following three basic types of portfolios. Use this information to select and build a strong portfolio (whether you are a passive or active investor).
- An equity portfolio is made up of stocks. It’s best used by passive investors since stocks perform better over time.
- An equity and bonds portfolio is where you invest in stocks and bonds. How much you invest in each depends on factors like your age and how much risk you’re comfortable with.
- An equity, bond, and gold portfolio is investing in a mix of stocks, bonds, and gold (or other commodities like silver).
1. Equity Portfolio
An equity portfolio is where you invest exclusively in the stock market and is the most basic type of portfolio. Stocks have historically outperformed bonds by 20% which makes this portfolio very attractive.
But despite the potential for high returns, there’s also potential for high risk. The stock market can go up and down over the course of a year. As such, if you’re in your 60s, you don’t want to put all your money in stocks and risk losing it if the market crashes in the short-term.
With that in mind, this type of portfolio is a better option if you’re
- younger than 40
- retiring at 60+
- have a higher risk tolerance
Also, this type of portfolio works better if you’re a passive investor. Passive investing, unlike active investing, means that you’re holding your investments for a long time without buying and selling.
You can invest in things like ETFs and Index Funds to get started, but you aren’t timing the market. You let your investments grow over time without worrying about market activity or crashes. You rest easy knowing that the stock market goes back up over time.
Getting started with a passive equity portfolio is easy. Go to a brokerage’s website like Vanguard, BlackRock, or Fidelity and invest in equities through them. Choose equity ETFs and equity Index Funds.
Tip: Invest regularly in your account each month. Don’t just make a one-time investment — otherwise, your money won’t grow as much over time!
2. Equity & Bonds Portfolio
Also known as a “Balanced Portfolio,” an equity and bonds portfolio is where you invest in a mix of stocks and bonds. It’s a traditional and popular type of portfolio for new investors and retirees.
Stocks help your investments grow, but they are also risky. Bonds offset the risk as they offer safer returns. 60% stocks and 40% bonds is a common split for a balanced portfolio and typically produces an 8.7% return rate.
You don’t have to follow 60/40, however. One way to determine how much to invest in both stocks and bonds is by using your age:
ASSET ALLOCATION BY AGE
Subtract your age by 100 to get the percentage of your portfolio that should be in stocks. Say that you are 25 years old:
- 100 – 25 = 75. This means that 75% of your portfolio should be in stocks.
Another age formula is bond-based. Subtract 40 from your age and multiply times two. Say that you are 25 years old.
- 25 – 40 = -15 x 2 = -30. This means you shouldn’t invest in bonds yet.
According to this formula, when you’re out of the negatives such as when you turn 41, you begin investing in bonds. 41 – 40 = 1 x 2 = 2%. When you turn 41, you would invest 2% in bonds.
Deciding which formula is right for you depends on your situation (e.g. health, other investments, etc.).
Get started with an equity & bonds portfolio
Go to a brokerage website like Vanguard (their fees are around 20%). Click on an investment vehicle such as Mutual Funds (a type of Index Fund). With Vanguard, you can view Traditional portfolio options and whether a portfolio is balanced or not.
Select a portfolio to then check how assets are allocated (aka what percentage is invested in bonds, what percentage is invested in stocks). Some portfolios might be split 60% stocks and 40% bonds while others could be 80% stocks and 20% bonds.
You can also choose to build your own portfolio and plug in your own percentages. Just know, however, that a balanced portfolio might require rebalancing over time. Rebalancing is what you do to keep your investment mix at the percentage you want.
Maybe you invest 60% in stocks, and 40% in bonds today. Over time, the value of the stocks is going to significantly increase which increases your risk.
To balance your investment mix, sell some of your stocks to buy bonds. Or just invest more money in bonds. It’s a good idea to check your portfolio once a year to determine if it needs rebalancing.
3. Equity, Bonds, & Gold Portfolio
An equity, bond, and gold portfolio is more advanced and modern than the first two. As you may guess from the name, you can invest in stocks, bonds, and gold in the form of index funds and ETFs.
So what exactly does gold look like as an investment? Gold — the original currency — is a commodity (aka a raw material or agricultural product that can be bought and sold).
Here are a few reasons to invest in gold:
- Limited supply which means it can keep increasing in value.
- Positive historical performance.
- Helps diversify your portfolio.
Stocks and gold are negatively correlated. This means that when the stock market goes down, gold goes up which can offset any money you lose with stocks.
Add gold to your portfolio though Gold ETFs. You can also invest in other commodities like silver, copper, and even cattle! Invest in these commodities in place of gold or alongside it.
Ray Dalio’s All Weather Portfolio is one option that lets you easily invest in stocks, bonds, and commodities like gold through five ETFs.
It’s a medium risk and well-diversified portfolio. Learn more about it here.
Choose from these basic types of portfolios.
You now know the basic three types of portfolios. Now what?
Well, in addition to the options we’ve listed above, websites like Portfolio Charts and Lazy Portfolio ETF offer advanced portfolio recommendations. Keeping your goals and risk tolerance in mind, you can simply copy the portfolio’s recipe for success.
For example, according to Portfolio Chart, if you choose the Three-Fund Portfolio, you could allocate your assets like this:
- 48% Total Stock Market
- 12% International Stocks
- 40% Intermediate Bonds
At the end of the day, though, no one can tell what portfolio to choose. It really depends on what you’re comfortable with. But understanding the different types can help you make the decision that’s right for your situation.
Get the full scoop on investment portfolios with the Complete Investing Course (Stocks, ETFs, Index/Mutual Funds) on Udemy. This course breaks down complex topics like stocks and building a portfolio into easy-to-understand concepts. Check out the course here.