How to Start A Million Dollar Portfolio from Scratch

Intro to Investing with the breakdown on building a portfolio pt.1

We can all agree that 2020 is a wild and wacky year. I still remember how bombarded we were with credit card repairs, Forex and Bitcoins in 2019. Once the market dropped in post pandemic, we were hit with a barrage of “Buying the Dip” not to be confused with Salsa or Guacamole.

Some ran into the dumpster fire of March 2020 and bought into hyped stocks like Hertz (the rental car company), LATAM Airlines Group, and Carnival Cruise Line.
Other people ran from the market capitalizing years of investing losses, only to hear about people winning two month later.
Some were hit with the wash-sale rule, crying about unrealized gains, and pouring their hard earned coins to be become someone’s passive income. All while grabbing all those sweet taxes when they file in 2021.

Table of Contents

Unrealized Investment Mistakes?

If the term unrealized gains, tax loss harvesting and anything else left you puzzled/confused and headed for the google search, this is great reading material for you.

This is part 1. Ask questions in the comments.

Investing is a complicated space akin to Vegas casino lobby but just across the street. On said street, people will sell you anything from candle stick graphs, fast cars and caviar, and “tried and proven” techniques of holding Mardi Gras beads for prayers. It was the proverbial wild-west with YouTube commercials of people living overseas during a full lock down and selling you more bitcoins than you can carry.

I won’t sugar coat it for you, “Investing is Gambling.” Smart gambling but gambling none the less.

It’s just a smart way to risk your money versus risking it in a Bank Savings account earning less than 1% while price inflation goes up 2-3% per year. Mind you, these Banking rats lend your money back out at 4-6% and dish out credit card with interest fees at an average of 14.99%. Basically, if you aren’t investing, you aren’t winning.

Here are the Key Takeaways

Understanding your personal finance before investing – Paying off Debt to setting a monthly dollar cost average amount.
Establish an Investing vocabulary – so you can avoid the scammers and you can look super smart at the next holiday party in 2021.
Defining your Risk Profile and Rick capacity – So that you aren’t betting your hard earn coins on deadbeats.
Figuring out your own investing style from individual stocks, mutual funds, index funds and ETFs, all while crafting your own investing portfolio.

How to make your personal finance, personal again.

There are a ton of gurus, authors, and sharply dressed femme fatales and guys minted off the set of Starz’s Power or USA Networks’ Suits, out here parading a variety of products. Rest assured, I’m just another one of those people with pajamas working from home but I’m trying to help you.

Before you jump to invest. Ask yourself these questions?

Are you living paycheck to paycheck?
Do you have more than $2,500 credit card balance or any balance at all?
Owe other people? Owe the bank?
Do you panic when things go bad? When things are at their worse? Do you panic when it’s raining brimstone?
Do you even know what you are doing?

If even one of those answers are bad; SLOW DOWN!! You aren’t quite ready to invest. It’s OK, for now you are doing the next best thing. You are getting your life together and set up for a rapid increase while you are learning. Take control of yourself and start to increase your wealth gap.

You are likely better off paying your credit cards first and reaching financial stability stage because investing is a rookie road of horrors.

Build Up Your Investment Vocab with these:

Here are some of the major asset classes:

Cash is the simplest investment asset. If you have enough cash to cover an emergency. Think anywhere from $1,000 to $2,500 if you are single, and $5,000 to $10,000 for family of four. It comes in handy if the AC goes out or the basement floods.
1. In investments, you can hold cash positions for the moments when stock prices drop. Rule of thumb – 10% is a good start. If you have $10,000 in investments, $1,000 is in cash – ready to be deployed for wealth combat.
Commodities are defined as tangible resources such as gold, silver, crude oil, as well as agricultural products such as wheat, corn, and even sugar cane. When stocks aren’t doing so well, Gold and Silver tend to go up as well as the infomercials for them.
Bonds are generally loan made by an investor to a borrower. Local, State, Government agencies and even municipal corporations tend to issue bonds, where they (the borrower) offer a fixed interest rate to the lender (you) in exchange for using your capital. Bond rates are typically set by Federal interest rates.
1. When things are good they stay relatively stable. When things are bad like 2020, they can go down to even 1%, for that reason they are considered SAFE.
Stocks are a small sliver of equity known as a share that allows investors to participate in the company’s success.
1. Growth stocks which are generally favored more since the numbers are flashy, provide investors valuation increases in the stock’s price.
1. Other stocks can lean toward Dividend income that give shareholders a monthly, quarterly, semiannual and annual payouts known as dividends.
Mutual Funds are a type of investments where more than one investor pools their money together in order to purchase securities. Mutual funds are managed by portfolio managers who allocate and distribute the pooled investment into stocks, bonds, and other securities. These funds garner higher management fees and expense ratios, or even front-end charges.
1. Some funds have minimum requirements of $1,000 per share.
1. Each share is diversified across as many as 100+ stocks.
1. Some funds mimic indexes such as the S&P 500 or DOW Industrial Index.
1. Buys are actionable at the end of the closing day.
Exchange Traded Funds (ETFs) are similar to mutual funds, however they are traded throughout the day.
1. Buy or Sell any time during the trading day.
1. Less fees associated with them.
Alternative Investments.
1. Real estate is one of the more well-known alternative investments. Instead of investors acquiring real estate directly by buying private, commercial or residential properties. Instead of incurring the higher cost and higher risk, investors are jumping on board for shares of real estate investment trusts (REITs). REITs are companies that emulate mutual funds. Investors are able to buy into the company that’s buying, purchasing, selling or leasing out.
1. Hedge funds also known as “alpha” investments since they often yield substantially larger returns on average. Just note that, the high reward is not guaranteed. These funds adhere to stricter trading rules akin to a secret club of high rollers. We are talking about investors who have initial investment capital of $1 million plus. You can’t just walk up to a hedge funds. You have to know people that know people.
1. Private equity funds fall into the alternative investment class. Private equity is composed of funds and investors that directly invest in private companies. The funding capital is typically used for Research and Development (R&D) related to new technology, vertical/horizontal acquisitions, expand working capital, and to bolster additional revenue to bring new products to market.

Understanding Risk Profile and Risk Capacity

As unique as your DNA, every investor has a risk tolerance that’s determined by their risk profile and risk capacity.

A risk profile helps you determine the proper asset allocation for your portfolio i.e. Conservative, Moderate/Balanced, or Aggressive.

If you can’t tolerate market ups and downs, you might have a lower tolerance which would move you toward more Moderate or even Conservative. However, it is also true that an investor should consider their Risk capacity. If you ever watch someone lose their car in a bet and cry about it later in desperation, they might not have had the capacity to do so. They bet way too much.

Risk capacity is the “amount” of risk that the investor can take or should take to meet their financial goals.

For example, if you only have $5,000 to your name; I would not recommend that you invest the entire $5,000 – you lack the capacity since if it fails you lose everything. Maybe risking $2,000 +/- 50% risk might be up your alley for starters. Common examples of risk allocations include:

Extremely Scared or Too Aggressive

Conservative

Minimal volatility — Investments such as CDs or money market accounts where you will see very little change. Especially useful toward older age group or if your time horizon is low and your dependency is high.

Moderate

Mild volatility – Investments earning moderate return hopefully closer to the historic annual average of 8% or more. You can stomach some of the roller coaster and your time horizon is about 10-15 years out.

Aggressive

High volatility – investments that remind you of a roller coaster at six flag with the willingness to lose the shirt off your back and maybe your pants too. Aggressive portfolios seek to yield epic level returns and in the shortest amount of time. Typical of investors with 20-40 year time horizons since they can weather the storm and hold turning downturns.

How to Invest in Your Own Portfolio?

If you know how to manage your money and you have some extra cash, the best time to invest is yesterday. The second best time to invest is today.

Here are so steps and ideas:

First, determine your investment goals. Are you doing this for the long term? Do you need to consider buying a home at some point? Are you living below your means and evaluated your own limitation? Are you ok with not having access to this money? Do you know about the tax consequences?
Pick a Brokerage firm like Fidelity, Vanguard, M1 Finance, etc. They are the middle person that you make trade through. It come down to which one you like to see more. Some offer more features than other, i.e. Robinhood is big on options trading for example.
Stay simple with an Index Funds or ETF, or even the Zodiac Portfolio to see how trading works. Some Index funds track the Standard & Poor (S&P) 500 index so don’t have to know it all to start.
Use the technique called Dollar-Cost Averaging where you set a number for the year and invest regularly like a bill. Let’s say you start off with $6,000 per year, that’s $500 per month.
Diversify and keep going.

A Million Dollar Portfolio Opportunity Summary

You can do this the right way or the wrong way.

If it’s fast and easy, then it’s packed with risk and losses. If it’s slow and intentional, you will yield rewards in the long run. Investing is just another step in your adult years. Some are horrified and get into get rich mode and lose everything. You don’t have to.

You can choose to first clear up the way you management money. Once you are set, all you need to do is invest regularly. Diversify your holdings. Review for high fees. Get Personal Capital and M1 Finance and move forward.

This wraps part 1 – Part 2 will dive into brokerages and next steps.