Market Health

The Secrets to Building a Healthy Portfolio

We all want to have financial independence.

We want to never have to worry about bills or expenses. And we want to be able to buy whatever we want without looking at the price tag. (Though, we’re definitely going to look anyway because we’re not trying to be price gouged.)

Now, I believe most people aren’t necessarily striving to be rich – at least not the kind of gaudy wealth celebrities flaunt and glamorize on TV and social media.

I think most people want to just be comfortable.

And this is why we invest.

But the secret to cobbling your own little peace of mind requires more than just set-it-and-forget-it investments or trying to capitalize on every single shake and shimmy stocks succumb to.

In reality, a healthy portfolio requires a little bit of everything.

Three Key Ingredients

There is no one-size-fits-all strategy when it comes to investing.

Brokers will try to cram as many investors as they can into the same stocks and same portfolio weightings.

But I don’t believe that’s the right route.

Successful investing means conceding that the most effective approach to building wealth requires three key ingredients: investing, trading and speculating.

Investing is taking the long-term view. It’s that tried-and-true Warren Buffett-style approach where you’re, essentially, looking to be a partial owner of a company.

These include companies like the FAANG+M stocks – Facebook parent company Meta Platforms (Nasdaq: FB), Amazon (Nasdaq: AMZN), Apple (Nasdaq: AAPL), Netflix (Nasdaq: NFLX), Google parent company Alphabet (Nasdaq: GOOGL) and Microsoft (Nasdaq: MSFT) – which you’re going to buy and hold for a very long period of time.

It also includes those dull but extremely powerful dividend payers. These are near-forever “Holds,” where the dividend reinvestment program (also called a DRIP) is tapping into one of the most powerful forces in the universe: compounding.

Trading, on the other hand, is taking the short-term or midterm view. You’re looking to capitalize on sharp upswings – or downswings – based on catalysts or momentum.

You’re not looking to get married to these companies. (Though, a successful dating period could lead to that.) You’re looking to jump in and get back out.

Speculating is similar to trading, but it involves higher-risk opportunities through options, cryptocurrencies, etc. With speculation, you’re looking for moonshots.

We don’t stress it enough, but building a healthy portfolio and striving toward financial independence requires an appropriate mix of these three key ingredients.

You want your portfolio’s foundation to be your investments, your long-term positions – dividend payers, FAANG+M stocks and whatever the next FAANG company might be. This will give you steady core growth.

Then, you want to supercharge that growth – really make your portfolio outperform – by taking advantage of different opportunities through trading and speculation.

Remember, don’t ever bet the farm on these. But you do want to tap into these profitable opportunities when they arise.

When $1 Million Is Not Enough

The S&P 500 Index’s long-term average return is 10% per year.

But year to date, the S&P 500 and the Dow Jones Industrial Average have been performing much better than that.

A 10% average annual return would turn $100,000 into more than $214,000 in eight years. And at that pace, $100,000 would become $1 million in 25 years.

Of course, if you have 25 years to watch your nest egg grow, that’s great.

But keep in mind that your purchasing power is declining 2% to 3% per year due to inflation.

And right now, we’re in a stretch that’s even worse than that. In October, the U.S. annual inflation rate was 6.2%, the highest level since November 1990.

Investors are in a race against time and inflation.

Although it’s crazy to think about, $1 million isn’t what it used to be. And it’s going to be even less as the years pass.

That means investors need to make sure they’re tapping into these three key ingredients to build healthy portfolios.

Financial independence isn’t unattainable. It just requires a little more work and nerve than in years past.

Here’s to high returns,

Matthew

P.S. The holiday season is just around the corner! Check out my holiday shopping tips for financial freedom by clicking here.

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