How to construct an investment portfolio

What I do: My portfolio is 100% equity ETFs. Just like you wouldn’t copy someone’s shopping list, I wouldn’t recommend copying my portfolio.

You’re here because someone told you to invest your money.

But no one tells you how, unless they’re trying to sell you something.

Here are three principles to know when constructing your investment portfolio.

1. Keep fees low. An annual fee of 0.5% is high. 1% should be the absolute maximum.
2. Diversify. Don’t put your all your eggs in one basket.
3. Keep things simple. The less you have to think about it, the better.

Keep fees low

When you invest, you are hoping to make money. Every dollar you pay in fees is a dollar you don’t keep.

A reasonable rate of return for global equities is 5%. If you pay a 2% fee, you get to keep 3% of the profits. That’s 2/5, or 40% of your profits gone to fees alone.

My own portfolio has an overall fee of 0.31%. That means 0.31/5, or ~6% of my profit goes to fees. Much better than 40%.

You also pay the fees when you lose money. Talk about kicking you when you’re down.

In fact, fees are the best predictor of future returns. The lower the fees, the better the returns.

Keep your fees low. 0.5% is high. 1% is the maximum anyone should be paying.

Diversify

Don’t put all your eggs in one basket.

This means owning a wide variety of companies across different countries and sectors.

Ben Carlson shows you that the best performing sector can change every year. We can’t tell what next year will bring.

Therefore, we should own the whole market. The best way to do so is with a broad-based global index fund.

Keep things simple

Simplicity is key.

Investing is like a bar of soap. The more you touch it, the less you have.

For most people, setting it and forgetting it is the best way forward.

The important thing is getting started

Don’t let perfect be the enemy of good. Start small and work your way from there.

Investing is how Ronald Read amassed $8m in wealth while working as a janitor and petrol pump attendant.

Next time, we’ll talk about asset allocation.