Building The Best Investment Portfolio for Long-Term Growth

Building an Investment Portfolio for Growth Featured Image

It’s easy to look at the rich and famous and wonder what it’s like to be wealthy. If only we had amazing talent or rich parents, we could know what it’s like to live a life of leisure as our money does the work for us. Right?

But the thing is, you too can be rich, or at least you can retire rich. No, you don’t need to inherit a fortune or win the Powerball.

The key is to start early, take advantage of the various investments and accounts available, and have the discipline to stick to your strategy. No matter what the TV talking heads say in their rants.

Then your money can start working for you rather than the other way around.

Planning to retire rich can be overwhelming at first. You see a lot of terms thrown around with complex names and numbers. But no need to worry. It’s not really that complicated, especially to get started.

In this article, we’ll take a look at how you can get started building a long-term investment portfolio that will help you retire rich. Read on to learn more.

What Is Retirement Investing?

Retirement investing is a specific long-term approach to financial management that helps ensure you have plenty of money once you stop working that 9-5. But remember, this is not a get-rich-quick scheme.

The idea is to have monetary wealth in a few decades, not next week. Your strategy is much more conservative than the average stock market gambler.

The plan is fairly simple. Invest as early as possible in a broadly diversified portfolio of financial instruments, fund your portfolio with as much capital as possible, and reduce risk as you approach retirement.

The younger you are, the more risk you can take on. As you get closer to retirement, shift your money into less volatile investments. It can be more complex, but this is the optimal retirement strategy.

Diversification helps reduce risk by averaging out the returns of the winners and losers in your portfolio.

Retirement Investment Accounts

Before we get to specific recommendations about where and how to invest your money, let’s look at some of the retirement accounts available.

Congress has created several particular account types for retirement investing to encourage retirement planning. These accounts provide special tax benefits and deferments that allow you to keep more of your money now and in the future.

401(k) Account

A 401(k) is an employer-sponsored retirement account.

Contributions are taken directly from your paycheck (pre-tax), and your employer will often match your contributions up to a certain limit.

The current yearly contribution limit is $25,000.

Roth Individual Retirement Account (IRA)

Unlike the 401(k), funds contributed to a Roth IRA are post-tax. However, your money can grow in the Roth tax-free and is not taxable upon withdrawal.

Current contribution limits are $6500 for 49 and below and $7500 for 50 and above.

Traditional IRA

Similar to the 401(k), the traditional IRA is funded with pre-tax money, which helps reduce your current tax burden.

While you will have to pay taxes when you withdraw the funds in retirement, you will pay less because you won’t be working and will be in a lower tax bracket.

7 Key Investments To Have In Your Portfolio To Retire Rich

Now that we know what kinds of retirement accounts are available let’s look at some critical investments you should include in a solidly diversified retirement portfolio

You must research these investments to understand the risks and rewards involved. We hope to introduce the concepts and steer you in the right direction.

1. Stock Index ETFs

Stocks (equities or securities) are ownership shares of companies that are bought, sold, and traded in the stock market. The stock market has had an average return of 10% per year for the last 50 years. For this reason, the stock market is one of the strongest investment opportunities available.

However, while you could spend time developing expertise in analyzing and buying individual stocks, we don’t recommend that strategy for beginning investors. It takes too much time and the risks are too high.

Mutual Funds are Great for Long-Term Growth

For those that want a simpler process of investing, we recommend investing in mutual funds. These collect resources from many different investors to give fund participants more shared buying power than they have on their own. The fund owns many stocks, and you own a percentage of the fund.

Avoid managed mutual funds, which are run by professional investors who claim to be able to beat the market – for a fee.

As we are planning long-term, we are perfectly happy to average 10-12% returns per year. Historically, very few fund managers can beat this benchmark.

Historic Annual Return % vs. Year of S&P500 - StockMarketEye

Instead, we want to invest in index funds, which track a specific stock index such as the S&P 500, the NASDAQ, or even the entire market. No managers required. This way, we avoid management fees and the complexity (and futility) of trying to beat the market in the short term.

Now, we could buy into index funds through brokerages or investment companies, but a much easier solution is to simply buy an exchange-traded fund (ETF), which is a type of mutual fund that can be bought and sold like a stock by retail investors just like you.

This is the Simplest and Easiest Method for Anyone

So to recap, the cheapest, easiest, and simplest way to tap into the historical stock market average of 10% return is to invest in an ETF that tracks a major stock index. Everything else exposes you to more risk or costs more in fees that chip away at your profits.

Benefits of Stock Index ETFs

  • Simplest, easiest, least risky way to access stock market returns.
  • Historically, the stock market returns 10% per year.

Risks of Stock Index ETFs

  • You will miss out on the big, flashy wins.

2. Dividend Stocks

Yes, we just said beginners shouldn’t buy individual stocks, but dividend stocks may be the exception in some cases. While newer companies need to reinvest profits to fuel growth, mature companies often pay out profits to shareholders in the form of dividends.

Dividend payouts provide your portfolio with a steady stream of funds that you can reinvest to continue to expand your portfolio. Because dividends are not income, they don’t count toward the yearly contribution limits of your retirement accounts.

Use Cash to Hedge Against Volatility

A good benefit to this is that the additional cash helps to hedge against stock volatility. Whether the stock price is up or down, you continue to get paid (as long as there are profits!)

If you decide to include dividend stocks in your portfolio, make sure to stick with mature, blue-chip companies. Stock prices of these companies are much less volatile, and the risk of dropping to zero is much lower.

Benefits of Dividend Stocks

  • Steady influx of non-income cash into your portfolio.
  • Dividends are usually paid by safe, stable companies.

Risks of Dividend Stocks

  • It can still go to zero, so still riskier than an ETF.

3. Bond ETFs

When a company or government needs cash, they issue bonds. When you buy a bond, you are lending the company or government money with the promise they will pay it back later with interest. This is different from a stock in that you are not a part owner of the company; you are just lending them some cash.

Bonds are available in a variety of different flavors, ranging from extremely safe government bonds to risky junk bonds. As with every other type of investment, risk and reward are inversely related, so government bonds are the safest but pay the least interest while junk bonds are the riskiest but pay the most.

The easiest way to gain exposure to the bond market is through bond ETFs. This way, you get the safety and security of bonds without having to research the benefits and drawbacks of specific instruments. Let the funds figure that out.

Benefits of Bond ETFs

  • Exposure to a diverse basket of bonds.
  • A very safe investment option.

Risks of Bond ETFs

  • Returns are about half of what stocks return.

4. US Government Bonds

Unlike stocks, owning individual bonds is both safe and recommended, and the US government is the safest bond issuer.. Government bonds are available in a variety of different types, each with different designs related to inflation, interest rates, and repayment terms.

Savings bonds are normally bought at a 50% discount of face value and offer fixed rates of return.

Savings bonds mature to face value at 20 years. Series-I Bonds compound interest semi-annually, which effectively grows the underlying principal more quickly.

Treasury Inflation-Protected Securities (TIPS) are a specific type of bond designed to protect against inflation by tracking the consumer price index (CPI). Unlike other bonds, the principal value of the bond can vary, and you are paid a fixed interest rate on the variable value. TIPS are available in terms of 5, 10, or 30 years.

Benefits of Government Bonds

  • Safest investment in the world.
  • Pays a steady return.

Risks of Government Bonds

  • Limited upside.
  • If interest rates rise, your bond is stuck at the rate you bought it at.

5. Crypto ETFs

Compared to stocks and bonds, cryptocurrency (or crypto) is a relatively new form of monetary exchange. Crypto is unique because it doesn’t rely on any central authority (e.g., banks and governments) to verify transactions between parties.

Instead, verification occurs through a digital ledger called a blockchain, which is monitored and verified by the entire user base.

While the future of crypto seems promising, it’s unclear what role cryptocurrencies will (or should) play in the global financial structure.

We’ve been doing stocks and bonds for hundreds of years. We have a pretty good idea of how these things are going to play in the market. Crypto is brand new by comparison, and nobody really knows what will happen with it.

As with stocks, we don’t recommend buying individual crypto coins. Instead, we recommend buying ETFs (are you seeing a pattern here?).

This way, you gain access to the potential benefits of the crypto market without risking your time or capital on individual coins.

In any case, it makes sense to include some crypto exposure in your portfolio, because we never know what the future might bring.

Benefits of Crypto ETFs

  • Huge future potential.
  • No centralized control.

Risks of Crypto ETFs

  • New and unknown.
  • Vulnerable to wild speculation.

6. Target-Date Funds

As we mentioned, the basic strategy for retirement investing is to take on more risk when you are younger. That lets you accumulate some extra returns, then slowly shift to less risky investments as you approach retirement.

Target-Date Funds take the guesswork out of this process. You simply decide when you plan to retire, then invest in the fund with that date. Over time, the fund automatically becomes less risky to coincide with your retirement.

Benefits of Target-Date Funds

  • Hands-off, fool-proof approach.

Risks of Target-Date Funds

  • No system can perfectly plan for the future.
  • Leaving potential returns on the table.

7. Real Estate

Before stocks, bonds, and even money, wealth was stored in land holdings. Still today, real estate remains one of the best investments available. It is the ultimate scarce resource, and it will never be worthless.

It is also a good hedge against the various financial instruments in your retirement accounts.

Real estate investing can mean buying and managing homes, owning apartment buildings, or investing in commercial real estate. The choice will come down to how much work you are willing to do as a landlord and how much profit you will give up to take a hands-off approach.

Suppose you don’t want to buy and manage actual real estate properties. In that case, you can invest in REITs, which are similar to mutual funds, except they operate a real estate portfolio instead of managing a basket of stocks. This way, you get the diversification benefits of participating in the real estate market without the hassle of managing physical real estate.

Benefits of Real Estate

  • Always has value.
  • Passive income from rent.

Risks of Real Estate

  • Do you really want to be a landlord?

How to Retire Rich: Step-by-Step

While all of this might seem overwhelming at first, it’s pretty easy to start. You don’t have to do everything at once. A respectable retirement savings portfolio is built step-by-step over time. As you learn more, you can increase the scale and complexity of your holdings.

The most important thing is to get started as soon as possible. The sooner you start, the longer your investments have to grow into real wealth.

Step One: Fund Your Retirement Accounts

The first and most practical step is to set up a retirement account. If available through your employer, open a 401(k). As mentioned above, your employer will usually match your contributions, so this is the best place to start.

If you don’t have access to a 401(k), open an IRA, which offers most of the same benefits (minus the matching).

In either case, do your best to max out contributions to these accounts. Contributing to a tax-deferred retirement account has a dual benefit:

  1. Reducing your yearly tax bill
  2. Using the money you save to grow your retirement savings even faster.

It’s a win-win.

Step Two: Begin Investing

With your accounts funded, it’s time to start investing. The absolute simplest thing you can do is invest in a target-date fund. You can be well on your way to a wealthy retirement with almost no effort.

If you want a more hands-on approach, you can look at investing in specific stock funds. Assuming you are toward the beginning of your career, it makes sense to take on a little extra risk. So, the first investment you make should be in an Index ETF.

A good alternative might be to buy ETFs that focus on market areas you are exceptionally knowledgeable about, such as tech or consumer goods. Your knowledge might give you a slight edge. But remember, people have yet to determine what will happen in the stock market.

It’s also a good idea to balance your portfolio with some exposure to bonds, so we recommend investing in bond ETFs right from the beginning. The closer you are to retirement (or if you have a low appetite for risk), invest more in bond ETFs than stock ETFs.

Continue to contribute the maximum amount possible to your retirement accounts, invest in ETFs, and be disciplined to accept that this money is “gone” until you retire.

Step Three: Continue to Diversify

Once your basic investment strategy is in place, you set aside a specific amount of capital to fund these goals. Then, you can further diversify your portfolio into other areas, such as dividend stocks or crypto ETFs.

As your knowledge and experience grow, you may invest in riskier individual stocks or crypto coins. If you win big, great. If you lose, your main retirement funds are still safe and intact – and you are wiser from experience.

You can also consider diversifying outside your specific retirement accounts by investing in real estate and individual bonds. Every new investment diversifies your portfolio and helps reduce your overall risk.

Step Four: Retire Rich

Now, all you have to do is wait and let market forces shape your investments into real wealth. Keep making contributions and have the discipline to stick to your strategy – no matter what might be happening at the moment.

With that said, it makes sense to track your investments to see how things are developing. Even though you’re in this for the long haul, you still might want to make adjustments over time. Having an effective system to track your portfolio will give you the information you need to make the right decisions.

Do that, and you will retire wealthy.

How Many Investment Portfolios Should You Have?

Splitting your investments across several accounts and brokerages helps you diversify and manage potential risk. The DOW can fall while the NASDAQ climbs. Maybe real estate is in decline as interest rates rise, but bonds give a solid yield at that moment.

Can you diversify too much? There is no exact science for how many portfolios you should have or how much to diversify. As long as you’re making smart long-term investments, you should be on track to retire with more wealth than you put in.

Start Investing For Your Future, Now!

We hope you better understand long-term investing and how it can help you retire rich. Even if you are starting from modest beginnings, if you have the discipline to stick to this proven strategy, your future can be a wealthy one.

Just remember that this is a long game, not a get-rich-quick scheme. We are the tortoise, not the hare. You might have to sit and watch others get big wins on risky stock plays, but don’t forget that the tortoise wins in the end.

You owe it to yourself and your loved ones to prepare for the future. If you don’t, who will? Get started today!

Jonathan Anthony Avatar
Jonathan Anthony Jonathan Anthony has spent the last 20 years writing about finance, fitness, films, freedom, and just about everything else. A native of the USA, he is now a citizen of the world.