Step-by-step to investing in stocks to reach your financial goals
Hey Bow Tie Nation, Joseph Hogue here with the Let’s Talk Money channel and welcome back to our special series on how to invest. We started with creating those financial goals in our post and today I’m going to show you how to invest in stocks that fit those goals.
For this video, I’m going to keep it at that bird’s eye view of how to invest according to those goals and your age. So I’ll show you how to really customize your portfolio with the right level of stocks, bonds and real estate as well as how to invest in stock sectors for diversification.
In our next video I’ll reveal how to compare individual stocks so you’re only investing in the very best. And the idea here is we’re using this three-video series to create a complete guide on how to invest from that higher-level concept of goals and portfolio, all the way down to which specific stocks you pick so make sure you catch all three.
In fact, I’m including a link here to a free checklist you can use to follow along with all three videos. Download your free How to Invest Checklist Now!
How to Invest in Stocks
So Nation, I know right now everyone is all-in on stocks. The market just had its best three months ever, jumping 36% in the twelve weeks since March 23rd and you’ve got some stocks posting twenty and 40% gains in a single day!
Why would anyone even think about investing in bonds or real estate or in anything other than stocks?
Well, because we all know that the market can and does go the other way…by a lot!
Having investments in not just other assets like bonds and real estate but by finding those gaps in your portfolio and investing in different sectors of the economy, it’s going to help cushion the fall when stocks aren’t a one-way ticket higher. What I’m going to show you in this video is going to protect that hard-earned money and give you the opportunity to take advantage of lower prices in stocks when the market crashes.
We’ll be using the Let’s Talk Money Portfolio tracker for the video to put in your portfolio or the stocks you’re thinking of buying to see how they create that perfect portfolio. The spreadsheet is going to show you how much you have in those assets and sectors as well as gaps in your portfolio. And part of how this fits in with our last video on goals, if you go back to the Investing Goals tab, the spreadsheet brings in your current portfolio value and uses historical returns for stocks, bonds and real estate to estimate exactly how much you’ll have for retirement.
Download the Let's Talk Money Portfolio Tracker Here!
So we’re here in the Portfolio tab and I’m going to use the stocks from a friend’s portfolio as an example here. Steve has 26 stocks and a lot of those popular names like Carnival, Tesla and Southwest Airlines. I put in the number of shares and the price paid for each and if I click Load Stock Data, the spreadsheet will update this with the current price and all this other information including the sector and industry.
I can also scroll down and put in some other, non-stock assets here like Bitcoin and real estate property. Jeff has about $175,000 in equity on his home so we’ll use that in here and estimate the long-term return at 8% a year on that money.
The first thing we can do is scroll up and look at how much Jeff has in each stock, not the dollar amount but the percentage of his portfolio in each company.
Everyone in the Nation knows my rule for this, that no single stock should make up more than 10% of your portfolio, and that’s an upper limit. I’d actually say even less, maybe no more than 5%. The last column here is color-coded with 3-5% as yellow, 5-10% is pink and anything over 10% of your portfolio is red. And we immediately see that Jeff has over 40% of his portfolio in shares of Amazon which have done really well over the past few months but it’s a major risk to his financial future.
Now I think Jeff Bezos is going to rule the world and the company already owns pretty much everything but think about this. If for some crazy, unforeseeable reason shares of Amazon drop by half, that’s 20% of this portfolio wiped out in the blink of an eye.
It’s why I say no more than five or ten percent in a single stock at most. People have lost their entire live savings in stocks like Enron and Lehman Brothers or even stocks that didn’t bankrupt but dropped hard like GE or Research in Motion.
So we know we need to get some money out of Amazon to spread it around a little and we can go to this Portfolio Overview tab to see more gaps in the portfolio. This first section shows us how much we have in each asset class and we see that Jeff has half in stocks and the other half in real estate equity…no bonds and no other assets.
Now I’ll show you some guidelines for how much to have in stocks, bonds and real estate depending on your age in a little bit but this is obviously something we’ll need to fix.
We can also scroll down and see the portfolio by sector of the economy, so the percentage of each sector in the portfolio and compared to its weight in the broader market, that S&P 500 index.
We see that Jeff has 70% in tech stocks, and this is something I see in a lot of investor portfolios, way too much in tech. Even compared to the overall market which is 27% in tech, this is way too much. He’s also got some in stocks of consumer cyclical companies, communication services and industrials.
The idea here is we’re going to use this information to see the gaps and what stocks or funds he needs to buy. Now I’m not saying you need to have stocks from every sector or close to the percentages we see those sectors in the stock market, but having all your money in stocks or all of it in just a few sectors is going to set you up to lose A LOT of money.
So from the Investing Goals tab, we see Jeff is 49 and actually doing pretty well. He wants to retire in 15 years, puts about a thousand in his account each month and the spreadsheet is taking that $308,000 portfolio, using historical returns and tells us he can expect a portfolio of nearly $1.5 million by the time he retires.
So it’s not like he needs to take a lot of risk and maybe wants to think about investing a little more in some of those safety sectors like Utilities, Consumer Defensive and Healthcare. Taking some of this money from tech stocks and putting it in these other sectors, gives him the opportunity to stay in stocks but with a little less risk.
He also needs some exposure to bonds to cut that risk further and protect his hard-earned money so what I’m going to do as an example, go into the portfolio tab, I’m going to sell down these Amazon shares to 10% of the portfolio so about six shares and then put that money in some bond funds and ETFs of a few stock sectors. So we’ll use the Vanguard Long-Term Bond Fund, the BLV, for our bond exposure, this SPDR Select Sector Healthcare Fund, ticker XLV, the Select Sector Utilities Fund, ticker XLU, and the Select Sector Consumer Staples Fund, ticker XLP for those sector stocks.
And if we go back to the Portfolio Overview tab, we see that it now includes that position in bonds, even if it’s only about 5% so we’d probably want to increase that a little more even. We can scroll down and see that we’ve lowered the percentage in tech stocks to 17% and included some diversification in some of these other sectors.
Now I want to give you some quick rules of thumb for how much you want in each of these, how much to invest in stocks, bonds and real estate according to your age. Understand these are only rough guidelines so feel free to have a little more or less depending on what works best for your goals.
For the younger investor in their 20s and 30s, you’ve got decades to invest and any single bear market crash really isn’t going to affect you much. Even if stocks tumble, you’ll have 30 years or more to ride prices higher which means you can have more in stocks and not worry about the risk.
That generally means between sixty- to 75% of your money in stocks and ten- to 15% in bonds. The bond portion of your portfolio here is really just as a cushion for those big stock crashes and to give you cash to take advantage of lower prices when they come along.
Now here I recommend between fifteen to 20% in real estate for that extra diversification and cash flow. I know a lot of investors have more in property or real estate stocks and I think you can take it up to a third of your portfolio if you like, but not at the expense of that bond portion.
As you get a little older, in your 40s and 50s, you want to start dialing back the risk in your investments. You’re still looking for that return on your money but you also want to make sure that money is there when you need it.
For that reason, we’ve brought the amount in stocks down to between 45% to 65% and increased the share in bonds to between 15% to 20% of your portfolio. We’ve also increased the percentage in real estate a little to between 15% or 25%. We’ve also added a 10% cash cushion here for unexpected medical expenses or short-term cash needs like your kids college expenses.
As you age into your 60s and beyond, your priority is going to be protecting the money you’ve earned and keeping up with inflation. You still need some kind of a return on your money, especially if you haven’t saved much, but job one is definitely making sure you don’t take any big losses on the portfolio and can cover your living expenses.
Don't forget to download your free investing checklist for all three videos!
So here we’ve reduced the portion in stocks to between thirty and 50% and increased our bond allocation to twenty or 30% of the portfolio. We might have between 15% to 25% in real estate as well which is going to help with those cash flow needs. Here we’d also have at least a 10% cash cushion and probably more for near-term expenses.
About the Author
Joseph Hogue is a financial expert and investment analyst. After serving in the Marine Corps, he started his career investing in real estate before becoming an investment analyst for some of the largest private investors. He's appeared on Bloomberg and on CNBC as an investment expert and has published ten books in personal finance. Now he helps investors reach their financial goals and invest in the stock market with some of the same advice he used when working for the rich.