Building Your First Portfolio#

Now that you understand risk and have a brokerage account, it's time to think about what to actually invest in. This lesson will help you build a simple, diversified portfolio that sets you up for long-term success.

A portfolio is simply your collection of investments—all the stocks, bonds, funds, and other assets you own across all your accounts.

The Building Blocks: Stocks vs. Funds#

You have two main approaches to stock investing:

Individual Stocks#

Buying shares of specific companies (Apple, Microsoft, etc.)

Pros:

Choose exactly which companies you own
Potential for higher returns if you pick winners
No ongoing management fees

Cons:

Requires research and monitoring
Less diversification unless you buy many stocks
Higher risk if one company underperforms

Investment Funds#

Buying funds that hold many stocks for you

Pros:

Instant diversification (one fund can hold hundreds of stocks)
Professional management or index tracking
Less time-intensive

Cons:

Ongoing expense fees (though often very low)
Less control over specific holdings
Average market returns (by design for index funds)

For Beginners

Most investment professionals recommend starting with funds, especially index funds or ETFs. Once you have a solid foundation, you can add individual stocks if you're interested.

Understanding Index Funds#

An index fund is designed to track a specific market index, like the S&P 500.

How Index Funds Work#

Passive management: Simply buys all (or most) stocks in an index
Low costs: No expensive stock pickers needed
Market returns: Designed to match the index, not beat it

Popular Index Funds#

Index	What It Tracks	Example Funds
S&P 500	500 large U.S. companies	VFIAX, FXAIX, SPY
Total Stock Market	Entire U.S. stock market	VTSAX, FSKAX, VTI
Total International	Non-U.S. developed markets	VTIAX, FSPSX, VXUS
Total Bond Market	U.S. investment-grade bonds	VBTLX, FXNAX, BND

Understanding ETFs#

ETFs (Exchange-Traded Funds) are similar to index funds but trade like stocks throughout the day.

ETFs vs. Index Mutual Funds#

Feature	Index Mutual Fund	ETF
Trading	Once per day (end of day)	Throughout the day
Minimum Investment	Sometimes $1,000-3,000	Price of one share (often $100-400)
Expense Ratios	Very low	Very low
Tax Efficiency	Good	Often slightly better
Fractional Shares	Often available	Increasingly available

Bottom Line

For most investors, index funds and their ETF equivalents are essentially interchangeable. Both are excellent choices for building a diversified portfolio.

The Importance of Low Costs#

The expense ratio is the annual fee you pay to own a fund, expressed as a percentage of your investment.

Why Expenses Matter#

A 1% difference in fees might not sound like much, but over time it's enormous:

$10,000 invested for 30 years at 7% return:

0.03% expense ratio: $74,017
1.00% expense ratio: $57,435
Difference: $16,582 lost to fees

Always check expense ratios. Index funds from Vanguard, Fidelity, and Schwab often charge 0.03-0.15%. Actively managed funds often charge 0.50-1.50%+.

Asset Allocation Basics#

Asset allocation is how you divide your portfolio among different asset classes (stocks, bonds, cash, etc.).

A Simple Framework#

The traditional rule of thumb: Your bond allocation should roughly equal your age.

Age 25: ~75% stocks, ~25% bonds
Age 45: ~55% stocks, ~45% bonds
Age 65: ~35% stocks, ~65% bonds

Modern approach: Many advisors now suggest holding more stocks, especially with longer life expectancies:

Risk Level	Stocks	Bonds
Conservative	30-40%	60-70%
Moderate	50-60%	40-50%
Aggressive	70-90%	10-30%

Sample Starter Portfolios#

The One-Fund Portfolio#

The simplest approach: a target-date fund (also called "lifecycle fund")

Pick a fund matching your expected retirement year (e.g., "Target 2055")
The fund automatically diversifies and adjusts over time
One purchase gives you stocks, bonds, domestic, and international

Examples: Vanguard Target Retirement Funds, Fidelity Freedom Funds

The Three-Fund Portfolio#

A classic simple portfolio:

Fund Type	Allocation	Purpose
U.S. Total Stock Market	60%	Domestic stocks
International Stock Market	20%	Global diversification
U.S. Bond Market	20%	Stability, income

Adjust the percentages based on your age and risk tolerance.

Building Your Portfolio Step by Step#

Determine your allocation (how much in stocks vs. bonds)
Choose your funds (index funds or ETFs with low expenses)
Invest regularly (monthly contributions)
Rebalance annually (adjust back to target allocation)

Dollar-Cost Averaging#

Dollar-cost averaging means investing a fixed amount regularly, regardless of market conditions.

How It Works#

Instead of investing $12,000 all at once, invest $1,000 per month for 12 months:

When prices are high, you buy fewer shares
When prices are low, you buy more shares
Over time, you average out the price

Benefits#

Removes timing pressure: No need to guess when to invest
Builds habit: Automatic, regular investing
Reduces regret: You won't invest everything right before a drop

Set up automatic investments from your paycheck or bank account. Most brokers make this easy, and "paying yourself first" is one of the most effective wealth-building habits.

Getting Started Today#

Here's a simple action plan:

Open a brokerage account (if you haven't already)
Decide on your allocation (a target-date fund is perfectly fine)
Set up automatic contributions (even $50-100/month is a great start)
Don't overthink it: A simple, low-cost portfolio beats paralysis by analysis

Key Takeaways

A portfolio is your complete collection of investments
Index funds and ETFs provide instant diversification at low cost
Expense ratios matter enormously over time—keep them low
Asset allocation divides your money between stocks, bonds, and other assets
Target-date funds or simple three-fund portfolios work well for most investors
Dollar-cost averaging helps remove the stress of timing the market
The best portfolio is one you'll actually stick with