How to Divvy Up Your Investments

A quick review of investment strategies and how to use them to maximize your gains

Investing is integral to modern wealth creation and is becoming more critical than ever. Collectively, we’re phasing out pension plans, leaning into an uncertain future of Social Security, and watching as automation threatens to take millions of jobs.

Investing has always been important, but the uncertainty we find ourselves in has made it paramount. Change is happening, and the onus of wealth creation is shifting more toward the markets than ever—all we have to do is participate.

Investing in the capital markets (think stocks and bonds, mutual funds, ETFs, etc.) is an extremely broad term that includes many subcategories and methods. But what’s the right way to do it? Who's to say which is the best path to choose?

It’s easy to become overwhelmed by all the options, so let’s narrow this down into a few main categories and see what makes each tick.

Primary Types of Investing

Long-term investing

Long-term investing is for those who have long-term investment goals. Although the exact allocations and holdings may differ, long-term investing has a goal of simplicity, consistency, and gains over a 10+ year time horizon. Many think about this strategy to include passive investing, where one can set it, forget it, and retire with a sizable nest egg.

Income investing

Income investing can fall into both passive and active categories. Most investors who choose to invest for income seek holdings that generate cash flow (think dividend-paying stocks or interest-generating holdings) versus positions that increase their inherent value (or market price) but do not provide cash flow. Income investing includes buying bonds and dividend stocks that pay somewhat consistently. However, remember that even the best bonds and dividend yields are hard to rely on for a steady, risk-free income stream.

Active investing

Active investing is for those who want to watch the markets and their positions constantly. This type of investing tends to be riskier when self-managed. Even active investing run by a professional can (and often does) underperform the market or a passive holding.

Active investing often involves lesser-known stocks, crypto, and other alternatives. If you enjoy stock picking, trying to time the market (which, by the way, you can never “time the market”!), and doing your research in hopes of picking out your next winner, active investing could be right up your alley. Be warned, active investing, when managed by a non-professional, is challenging and rarely outperforms passive holding. Remember, in buying and selling positions, you have to "get it right" twice— both when you buy and sell the position.

How to Create a Portfolio Mix

There’s no "one size fits all" approach to the markets, but there is a size that fits best for each of us. At the same time, there are many different ways to invest—to each their own! We each have to find the right fit for our situation, which takes some thinking.

Things to consider when creating your portfolio mix

(Or, in fancy finance jargon, your “asset allocation” or your “diversified portfolio.”)

Time Horizon

When deciding how to diversify your portfolio across active, passive, and income investing, your time horizon plays a significant role. As a youngin’ with time on your side, maybe you can afford to miss out on some gains and compound interest, whereas an investor looking to retire soon cannot.

Risk Tolerance

Different investments are inherently more volatile than others, and your risk appetite will help determine which works best for you. For example, investing actively and holding single stocks makes your portfolio more prone to volatile movements and mayhem than those broader holdings often associated with more passive methods.

Account Breakdown

Different accounts make sense for different investments, and holding the wrong investment inside the wrong account can easily create unwanted tax bills if not handled correctly. For example, you’ll get taxed on dividend payments and, for mutual funds, year-end taxable gains unless you hold them inside a tax-advantaged retirement account like a 401(k).

In Sum

If you don't enjoy interacting with the markets day-to-day, then that good ole’ passive investing is probably where you belong. You can’t consider any one factor in isolation. You’ll need to review your situation holistically and decide what makes the most sense for you and your money based on the above factors.

Conclusion

Investing your money can be a daunting task, and understandably so, given all the different ways to do it. There is no singular right way to invest like there’s no precise way to do…well, almost anything! Ultimately, the most important thing of all is just to get started.

Log into the Pocketnest app, check your To-Do List, peep your transactions, and stay on track. #YouGotThis!