Starting an investment portfolio is an important step in creating wealth. In this series, Portfolio Foundations, we’ll cover topics we believe are worthy of thought and planning. Starting a successful portfolio will require less financial study than you think and more personal reflection and control. In fact, we think you should consider where you open your portfolio account and how you react to information before buying a single security.
You have access to information regarding every company in the world and that information will be part of your success or part of your loss. Every broker (the company where you open your retirement account) displays information differently and that will impact how you make decisions regarding your finances. You should have a clear goal and know what you want to use this portfolio for. You should consider the broker you use the tool that will stay with you for the entire journey, and ask yourself if this tool is helpful to your long term financial goals. Let’s dive into goals, emotional control, and what to consider when picking a broker.
TLDR - Your reactions are going to affect your investment performance more than you think. Consider how much risk you can tolerate, and how seeing your money shrink will make you react. Use a broker that matches well with your weaknesses and goals. If you are tempted to sell when things go bad, it’s probably best to avoid brokers that send you notifications every hour.
Question 1: What is my investing goal?
Setting a clear goal at the start of your portfolio is going to help you answer a lot of identity questions down the road. If you’re focusing on retirement, knowing that will help you fight the urge to make drastic trades that prevent compound interest. If this portfolio is going to be used for a large purchase in the next year, you’ll understand that you will have to trade stability for risk in order to get the returns you want. Write your goal down and understand how incoming information affects the way you look at your goals. A portfolio that won’t be used for a few decades does not need daily notifications. A portfolio that is more aggressive and active stands a better chance at success when it has access to current information and trading options. Knowing your goal is key to knowing what broker will be the tool.
Question 2: How do you feel about your emotion control?
This gets a little personal now and yes, it’s important to financial success. Similar to knowing what your goals are, knowing how your emotions around money work can help you pick what company will best help you. Markets are unpredictable; at any moment you should be okay with seeing your portfolio lose 50%. Your reactions are the only things you can control in investing. If seeing a market drop stresses you out and your reaction is to sell, you may benefit from a tool that makes selling hard, to prevent you from losing money. If seeing a market drop makes you think of opportunities, you may benefit from a broker that gives you access to high instant deposits so you can take advantage. You should think deeply about how you react to good news and bad news and you want to have a company that matches well with those traits.
Question 3: How hands-on do you want to be?
Vocabulary time! What does it mean to be a passive investor or an active investor? Passive investors want to have a hands-off approach and this is done by buying ETFs and other Index Funds, or by using a Robo-advisor that will do most of the decision making. Passive investors will let compound interest do its job and avoid getting in the way with frequent trades. Active investors will do the opposite and look for opportunities to buy and sell to make a profit. This requires more risk and being connected to their accounts more often. Speed and current information are important if you plan to take an active approach and having a broker that allows limitless trading and constant information will be key. Whatever your investment personality may be, make sure your broker aligns well with you. Sometimes that is filling in weaknesses, or matching strengths. Either way, be very honest about who you are and what your goal is.
We don’t want to over analyze every step of starting a portfolio, but we do think there is a lot to be gained by planning where you set up your portfolio before you buy anything. Brokers vary in how much they charge and what benefits they offer. Make sure you know what you’re paying for and what will help you reach your goals. Good luck, and go earn!
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