Since we are celebrating Nurses Week by talking about becoming financially free, we will talk more about investing today instead of a clinical pearl. So, let’s talk about building an investment portfolio, and I will also go over some examples toward the end!
Building a balanced investment portfolio is essential for long-term success in our volatile world. I am sure many of you are sick of seeing their 401ks fluctuate almost daily! To minimize your risk when investing your money to accelerate your path to financial freedom, you need to have a balanced portfolio.
A balanced portfolio is a well-diversified investment mix that aims to provide steady growth while minimizing risk. I am going to talk about building a balanced brokerage portfolio outside of real estate but be sure to include some real estate in your investment mix if you truly want to minimize risk, enhance tax savings, and build for a financially independent future.
So, let’s begin:
Determine your investment goals.
The first step in building a balanced portfolio is to determine your investment goals. Are you investing for retirement, to retire early, to buy a house, or to pay for your child’s education? Knowing your investment goals will help you determine the appropriate level of risk you’re willing to take and the investment products that align with your goals. If you need the money in a shorter amount of time, then you should take on more risk. If you are building a portfolio to sustain your life for 10, 20, 30+ years, then you need to minimize your risk and focus more on steady growth and income generation.
Understand asset classes.
To build a balanced portfolio, you must understand the different asset classes that exist. Asset classes are a group of investments that share similar characteristics and behave in a similar way in the market. The three main asset classes outside of real estate are stocks, bonds, and cash.
Stocks: Stocks are shares of ownership in a company. When you buy a stock, you own a portion of the company and can benefit from the company’s growth.
Bonds: Bonds are a type of investment where you lend money to the government or corporation and receive regular interest payments.
Cash: Cash includes money market funds and other short-term investments. These are low-risk investments that provide a stable return but with minimal growth potential. Money market funds are paying 4-5% right now just FYI! That is RISK FREE money folks.
Allocate your assets.
Once you have determined your investment goals and have an understanding of the different asset classes, it’s time to allocate your assets. A good rule of thumb for a balanced portfolio is the “100 minus age” rule. This rule states that the percentage of stocks in your portfolio should equal 100 minus your age. For example, if you’re 30 years old, your portfolio should have 70% stocks and 30% bonds. This is a very rough estimate but will help you in determining how much you need for growth and how much you need for stability. Stocks tend to be more volatile than bonds, therefore if you are 30 years old and plan on retiring by the time you are 50, then you need more in stocks so it can grow and increase your wealth. If you are already financially independent, then you should limit your risk and invest more in income-generating assets that preserve your wealth vs. growing it.
Rebalance your portfolio.
Rebalancing is the process of adjusting your portfolio’s asset allocation to maintain the desired balance. As the market changes, the value of your investments will fluctuate. Over time, the allocation of your assets will drift away from your original plan. To keep your portfolio balanced, you should periodically rebalance your assets. Essentially, you will take money out of different stocks, and put them in other stocks or bonds etc… I rebalance my portfolio 2-3x a year on average.
Consider diversification.
Diversification is the practice of spreading your investments across different asset classes, sectors, and geographies. Diversification helps to reduce risk by minimizing the impact of any one investment on your portfolio. It helps you be financially REDUNDANT. A well-diversified portfolio includes a mix of stocks, bonds, and cash, as well as investments in different sectors such as technology, healthcare, energy, consumer staples, and so forth.
Seek professional advice.
If you’re new to investing or don’t have the time to research investments, consider seeking the advice of a professional financial advisor. A financial advisor can help you determine your investment goals, allocate your assets, and create a well-diversified portfolio that aligns with your goals. I do not think it is necessary to have one that you see or pay monthly, but it is a good idea to pay one from time to time to review your portfolio or even help you build one. I use a financial advisory 2x a year to help me rebalance my portfolio. I just pay them a flat rate for their time. (Quick tip: NEVER pay a financial advisor a percentage of your portfolio or gains. Only pay them for their time.)
Building a balanced investment portfolio takes time and effort, but it’s an essential step in achieving your financial goals. By understanding asset classes, allocating your assets, rebalancing your portfolio, diversifying your investments, and seeking professional advice, you can create a balanced portfolio that provides steady growth while minimizing risk. Remember, a balanced portfolio is key to long-term success and will help you become financially independent!
Now, let’s go over some portfolio examples! But first, let’s cover growth portfolios vs income-producing portfolios!
Nurse practitioners who are seeking financial independence often will face the decision of whether to build a portfolio that prioritizes growth or income. Both strategies have pros and cons, and the decision depends on the nurse practitioner’s investment goals, risk tolerance, and time horizon. Let us go over the key differences between a growth and income-producing portfolio.
A growth portfolio typically invests in companies with high growth potential, often in the technology or healthcare sectors. These companies reinvest earnings into expanding their business, which can lead to substantial capital gains over the long term. Growth companies often pay little to no dividends, as they prefer to reinvest their profits into their businesses. So, don’t expect to see much in the way of income until you sell that asset.
An income-producing portfolio, on the other hand, prioritizes generating income through dividends, interest, or other sources. The portfolio typically includes companies and ETFs that have a history of paying consistent dividends, as well as fixed-income investments such as bonds, preferred stocks, or real estate investment trusts (REITs).
One of the main differences between the two strategies is risk. Growth stocks/funds tend to be more volatile than income-producing stocks/funds, as they are more sensitive to changes in the market and economic conditions. Income-producing stocks/funds tend to be more stable, as they often have established businesses and a history of consistent dividend payments.
Another difference is the time horizon. A growth portfolio is typically suited for long-term investors who are willing to hold on to their investments for a considerable amount of time, as the growth often takes time to manifest itself in any meaningful way. You should invest in growth stocks/funds on your path to financial freedom as it will help increase the value of your investment and accelerate the end goal of financial independence.
An income-producing portfolio, on the other hand, maybe more suitable for investors who need a steady stream of income to support their lifestyle or meet their financial goals. The income-producing portfolio is usually for the investor who has already generated a significant income and/or savings and wants to protect their wealth WHILE putting that money to work. This is where you are at when you have achieved financial freedom typically!
In terms of diversification, both strategies require a balanced mix of assets to minimize risk. A growth portfolio may include a mix of large-cap and small-cap stocks, as well as international stocks to diversify across different economies. An income-producing portfolio may include a mix of stocks and fixed-income investments, such as bonds or REITs, to balance the risk and return.
Nurse practitioner investors should also consider the tax implications of each strategy. Growth stocks may be taxed at a higher rate when sold, as they are often held for a longer period and may have higher capital gains (20%+). Income-producing stocks/funds are usually subject to lower taxes if held for a certain period, as dividends may be taxed at a lower rate than capital gains. This is why building a portfolio of dividend-paying stocks/funds/bonds is tax advantageous for those in early retirement needing to live off their investments.
A growth portfolio prioritizes investing in companies with high growth potential and little to no dividends, while an income-producing portfolio prioritizes generating income through dividends, interest, or other sources. The decision to build a growth or income-producing portfolio depends on where you are at in your journey to financial freedom. For most of you, you should be focusing more on growth as you want your money to work FOR YOU so you can get closer to that financial freedom number. If you have already amassed a significant nest egg, then focus on an income-producing portfolio.
So, let’s get to a few examples (disclaimer: these are for informational purposes only, always consult with a financial advisor if you are not sure what you are doing!):
The medium-risk growth portfolio:
Vanguard Total Stock Market ETF (VTI) – 40%
iShares Russell 2000 ETF (IWM) – 20%
Vanguard Growth ETF (VUG) – 20%
Invesco QQQ Trust (QQQ) – 10%
iShares MSCI EAFE ETF (EFA) – 5%
Vanguard Real Estate ETF (VNQ) – 5%
In this portfolio, the allocation to domestic and international stocks is split evenly. The majority of the domestic allocation is focused on large-cap growth stocks, with a smaller allocation to small-cap stocks. The portfolio also includes exposure to technology through the Invesco QQQ Trust, which tracks the Nasdaq 100 Index. The allocation to real estate through the Vanguard Real Estate ETF provides diversification away from stocks and bonds, as well as the potential for income through dividends. Overall, this portfolio is designed to provide long-term growth with a medium level of risk and would be a solid option for any nurse practitioner in the wealth accumulation phase of their financial freedom journey!
If your appetite for risk is lower, then you could look at this low-risk growth portfolio:
40%: iShares Core Dividend Growth ETF (DGRO)
30%: Vanguard Short-Term Corporate Bond ETF (VCSH)
15%: Invesco S&P 500 Low Volatility ETF (SPLV)
10%: iShares MSCI USA Minimum Volatility ETF (USMV)
5%: SPDR Gold Shares ETF (GLD)
This portfolio allocates the majority of its holdings to the iShares Core Dividend Growth ETF, which focuses on investing in U.S. companies with a history of consistently growing their dividends. This ETF is considered a growth investment because it focuses on companies with strong financials and growth prospects.
The Vanguard Short-Term Corporate Bond ETF is a low-risk fixed income investment that provides some stability to the portfolio. The Invesco S&P 500 Low Volatility ETF and iShares MSCI USA Minimum Volatility ETF are both designed to provide exposure to the U.S. stock market while minimizing volatility. Finally, the SPDR Gold Shares ETF provides some diversification and serves as a hedge against inflation.
Overall, this portfolio provides a mix of growth and stability, with a focus on low-volatility investments. But remember, lower the risk = lower the reward. So, keep that in mind. If you have a practice that is generating solid revenue and you don’t want to take much risk, then the above would be a solid option.
Now, what if you want to focus more on income-producing assets? Let’s go over a medium and a low-risk INCOME producing portfolio:
The medium risk income-producing portfolio:
Vanguard Total Stock Market ETF (VTI) – 25% allocation
iShares National Muni Bond ETF (MUB) – 15% allocation
iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) – 15% allocation
iShares Select Dividend ETF (DVY) – 10% allocation
Nuveen Select Tax-Free Income Portfolio (NXP) – 20% allocation
BlackRock Enhanced Equity Dividend Trust (BDJ) -15% allocation
In this portfolio, VTI provides exposure to the broad U.S. stock market, which is expected to generate long-term capital appreciation. MUB and LQD provide exposure to the municipal and investment-grade corporate bond markets, respectively, providing diversification and stability to the portfolio. DVY is a dividend-focused ETF that seeks to provide income through stocks that pay higher dividends than the broader market, while NXP and BDJ are both closed-end funds that provide income through dividends from a portfolio of high-yield municipal bonds and dividend-paying stocks, respectively.
With this portfolio, an investor can expect an average yield of around 5%, with a medium level of risk due to the allocation to equities and higher-yield fixed-income securities. This would work great for those wanting a solid return on established wealth!
The low-risk income-producing portfolio:
Vanguard Total Bond Market ETF (BND) – 40%
iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) – 30%
iShares U.S. Real Estate ETF (IYR) – 10%
Utilities Select Sector SPDR ETF (XLU) – 10%
Vanguard Dividend Appreciation ETF (VIG) – 10%
This portfolio consists of 40% in a broad-based bond fund (BND), 30% in an investment grade corporate bond fund (LQD), and 20% in dividend-focused equity funds (IYR, XLU, VIG). These funds are all considered low-risk investments, with a mix of fixed-income and equity assets.
BND tracks the performance of the overall U.S. bond market, providing exposure to a range of government, corporate, and mortgage-backed securities. LQD invests in investment-grade corporate bonds, which have relatively low default risk but offer higher yields than government bonds.
IYR and XLU invest in real estate and utility stocks, respectively, which are typically considered more defensive and less volatile than the overall stock market. Finally, VIG invests in stocks of companies with a history of increasing dividends over time, providing a reliable source of income.
This portfolio is designed to provide a steady stream of income with relatively low risk, making it a good fit for conservative investors. The inclusion of NXP and BDJ, as in the previous example, could be a viable option to further diversify and increase the yield, but would also increase the overall risk level of the portfolio. Personally, I am ok with that added risk as BDJ and NXP provide a solid return and have YEARS of consistent returns behind them!
Alright, I am going to stop boring you with all this finance talk! I hope this article has helped you wrap your mind around how to build a balanced portfolio! A balanced portfolio is absolutely CRITICAL to obtain financial freedom while mitigating risk. Now, get out there and generate some income through your practice and ensure you are investing that money appropriately so it works FOR YOU which will skyrocket your financial wellbeing and bring you one step closer to financial freedom!
