Investing Vehicles to Create a Portfolio

Dan Westfall

Dan Westfall

Investing Vehicles to Create a Portfolio

In the world we live in today, there are more investing vehicles to create a portfolio than ever before. So let’s make sure you put your money to work with one of them. Financial products are a huge business for Wall Street. Consider Stocks, Bonds, Options, Mutual Funds, ETFs, Structured Notes, and the relatively new market of crypto currencies.

The investing vehicles being used today could take up half of this post. That wouldn’t even include the insurance agent’s favorite way to “invest” using Annuities. Annuities are technically not an investment. However, if you talk to a financial advisor or insurance agent that sells Annuities, you might be convinced they are the best kind of investment. I’ll go into more detail on those in a future post. There are several reasons to avoid Annuities and anyone that sells them.

Types of Investing Vehicles

Type of Investing VehiclesThere are so many ways to invest your money. How should you or even a financial advisor even start?

When constructing an investment portfolio, there are always a number of variables that affect decisions. Here’s my top 3 checklist of initial considerations for an investor starting the process:

  • What are the goals of the money? (retirement, a single purchase like a house, etc.)
  • How long until you need to use part of or all of the money?
  • How much fluctuation can the investor handle?
The 3 Ds of Investing

Getting a better understanding of the questions above is important. This is true even if you are doing your own investment management.

Say you need the money. Then fluctuations from the investing vehicles being used wipe away gains. Even worse, these variations take out the initial investment. That’s the last thing you want as an investor.

Always remember the 3 Ds of investing:

  1. Diversification
  2. Discipline
  3. Dollar Cost Averaging

Create An Investment Portfolio

Let’s use a hypothetical case of an investor who is choosing investing vehicles to create a portfolio. That way I can give you an example of how to construct a portfolio using different investing vehicles.

Bob is 30 years old with $50k in his Roth IRA. He is very willing to sit through down fluctuations within the account and is consistently adding money every month to the Roth IRA. This is a retirement account, so he doesn’t plan to take money from it for at least 30 years. His income is stable and sees himself consistently maxing out the Roth IRA every year.

Investment Vehicles

Using that example above, Bob can put together a mix of Asset Classes that will have high long-term return and high amounts of fluctuation since he has 30+ years. He is also adding money each month (Dollar Cost Averaging) to the account. As a result, this will help even out some of the fluctuations over time. He could use an investment portfolio breakdown along this makeup:

  • Cash: 0-5%
  • Stocks/ETFs: 80-100%
  • Alternative Investments: 0-20%
    • REITs
    • Crypto
    • Long Dated Call Options
    • Limited Partnerships

 

Stocks or ETFs that are a basket of stocks have a high degree of short-term fluctuation but long term the past returns have been higher than most other asset classes. This is the reason why I’d make that either a large percentage or all of a portfolio like this.

Vehicles For Investments

Personal Investment Vehicles

I don’t want to leave out other asset classes that may be able to outperform and offer diversification. For instance, consider REITs (Real Estate Investment Trust), which became an investing vehicle in 1960. This allows regular investors to put their money into commercial real estate. REITs have seen similar returns to stocks over the long term. Real Estate Investment Trusts are typically not correlated, meaning they don’t move in the same direction as each other.

Over the last decade, cryptocurrencies have become a new investing vehicles for many aggressive investors. These investors are willing to take big drops on the downside for huge returns on the upside.

Eventually crypto will become more widely regulated. The volatility of cryptocurrency will likely go down. However, these investing vehicles could potentially be a way to get a higher return aside from stocks.

Long dated options

Long dated options are a simple way to leverage the buying power of stocks while taking a 1-3 year view on a stock, ETF, or index.

Limited Partnerships

Limited Partnerships can be another way to diversify away from stocks, just like Crypto or REITs, while still being more aggressive towards long term growth.

Vehicles For Investments

Someone that is in retirement would likely have a different makeup than Bob above. Investing vehicles such as Bonds, Protective Puts, Covered Calls, Dividend Paying Stocks, and REITs would likely be making up more of the portfolio since they generally provide an income stream from the investment and/or offer protection against large portfolio fluctuations.

Create Your Investment Portfolio

There are many ways to design a portfolio using different investing vehicles. The above example with Bob is only one way. This example is not a specific recommendation of Client Focused Financial or me, Dan Westfall. Consult your own financial advisor or reach out to me directly to go over your specific financial and investment goals before you choose investing vehicles to create your portfolio.

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