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Investing portfolio considerations

Now the fun begins. You now have basic knowledge about stocks, bonds, ETFs, mutual funds, different ratios to consider and many more tools to determine if a stock or bond is worth purchasing. But there are so many options, where to begin…?

26.1. Age determines everything

As mentioned in my basic investing guide, age is everything. Your investing goal is always tied to your age. You simply can’t invest for the next 30 years when you are seventy years old. Chances are you will die before 30 years expire. Also, when you are seventy, you are probably relying on a pension or other small streams of income. That means you can’t take too many risky investments. But when you are 25, you can invest for at least four decades before you retire. If you make some bad decisions you can easily adjust your strategy. 

In simple words, the best age to start investing your money is as soon as possible. Your investments will compound over the next years and decades. That does not mean all investments work out the way you would like. If that was true, everybody would be a millionaire. There is always a risk you will lose a part or all of your money. And to reduce that risk you should always do fundamental or technical analysis. But beware that there are always risks involved. It's not about avoiding risk but managing them.

Creating a portfolio is a personal approach which is tied to:

  • Your age
  • Your goals
  • Your current and future income
  • The amount of risk you want to take

If someone advises you to follow a certain portfolio or giving stock advice without even knowing all of the above is very bad advice. The only one who can build a portfolio based on your needs is you. You can either do that yourself or hire someone to do it for you. But if you hire someone this will influence your returns since you have to pay someone to do the work. Also, most advice is very generic because if a bank that is giving investing advice to tens of thousands of customers there is no unique approach anymore. Besides, the advisor itself is probably not investing in the things they advise you to invest in. Their goal is not to make you money but to earn money from their investing services. That does not mean all advice is bad. But you should have basic knowledge about investing before you consult an expert so you can verify what they are advising.

Benjamin Graham (mentor of Warren Buffet) did use a formula to calculate how many risky versus safe investments you should have:

  • Subtract your age from one hundred and invest that percentage of your assets in risky investments
  • The other percentage should be invested in relative safer assets like cash, gold or bonds

Be aware it's just a guideline. 

26.2 Don’t only focus on the things you know

A common mistake is focussing on the things you know. Everybody knows Google, Apple, Microsoft and Coca Cola. Chances are you won’t make huge gains from these kinds of stocks. Boring industries can have many undervalued stocks. Think about companies that dispose waste or provide funeral services. It may not come to mind to invest in companies that bury the dead. But these are still companies with the goal of making money. Because these companies have much lower overall interest, some gems might be found.

26.3. Maintenance, transaction fees, taxes and inflation

While your emotions are the number one enemy on any market, fees are enemy number two. High fees can cut your returns in half or even worse. Buying stocks and bonds is not free. In most cases you’ll have to pay a transaction fee every time you buy and sell a stock. Most emotional traders make so many trades that transaction fees are causing their accounts to bleed without even realizing it.

Mutual funds and all other funds that are actively managed charge maintenance fees. These fees seem pretty low but over larger periods of time these fees have a major impact on your portfolio. For example, based on an initial $100.000 investment over 20 years with an annual return of 4%:

Annual return Amount of fee Portfolio value after 20 years
4% 0% $219,112.31
4% 0.25% $208,413.03
4% 0.5% $198,211.30
4% 1% $179,213.48


Annual return Amount of fee Money lost due to fees
4% 0% $0
4% 0.25% $10.699,28
4% 0.5% $20.901.01
4% 1% $38.898.83

And this is excluding other fees like:

  • Sales load (broker costs for buying and selling or reinvesting the earned interest)
  • Redemption fees 

A fee of 1% seems small but over 20 years this will cost you a whopping $40.000. That is 17.5% of the entire portfolio value.  When purchasing any stock, bond or other investment you need to know what the fees are. Do you have to pay for advice? Do you have to pay when you buy and sell? Fees can be hidden in many spots.

But that’s not all. The money you spend on paying fees could also be reinvested. For example, if you had 0,5% maintenance fees instead of 1% you could invest $18.000 more. Also, when the portfolio grows, the fees also grow because fees are almost always percentage based.

It is crucial for any investor to keep fees as low as possible. Fees will have a major impact on your returns in the long run. So if you want to hire someone, check what fees they charge. If they give “free” advice but charge a 1% fee based on the portfolio value you are probably paying a very high price for the “free advice”.

Additional costs are the biggest reasons mutual funds and hedge funds are not able to beat the market. They are buying and selling too many times, on top of that they charge high maintenance fees. That is not necessarily a bad thing but they must have extraordinary results relative to all the costs. In that regard, passive ETFs have overall the lowest cost of almost all investment types and are typically the best option for 90-95%% of all investors. They have very low cost and require very low maintenance. They are also very boring and generate moderate results at best. 

And as if this is not enough, you also have to pay taxes that come on top of all the fees you need to pay. You can imagine that all these small fees and taxes can build up pretty quick resulting in a devastating effect on your portfolio value.  And what to think about inflation? While you have zero impact on inflation, it's an important factor to take into consideration. In the last few months (end of 2021)  inflation rose to 6% in the U.S. due to the low interest rates. Meaning, the buying power of every $1 decreased by 6%. Before counting yourself rich, always check how much profits you actually made and lost by calculating:

  • All kinds of fees
  • Taxes
  • Inflation

A pay raise of 2% might seem like a good thing but if the overall inflation is 6% that means you have 4% less buying power. This can be a mindfuck because you get more money in your bank account but you can buy less products and services.


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