Investing in Your Future: Building a Foundational Portfolio

October 25th, 2024

Estimated Reading Time: 8 Minutes

At Chicago Partners Wealth Advisors, we are dedicated to guiding young investors through the complexities of personal finance. Through our Young Investors Webinar Series, we provide foundational financial knowledge to help guide young professionals to make confident, well-informed decisions.

Our latest session, Investing in Your Future: Building a Foundational Portfolio, introduced essential strategies for investing, including optimizing investment placement and understanding how to align your portfolio with your financial goals. Below is a recap of the webinar’s key insights.

Webinar Replay

Optimizing Investment Placement

One of the webinar’s key lessons was the importance of allocating different assets to the appropriate types of accounts to maximize tax efficiency and long-term growth. While it is important to diversify all of your portfolios with different assets, certain investment types can have unique benefits depending on which account they are located in. Our experts walked participants through various account types, emphasizing that understanding the role of each is vital for building a strong portfolio.

Traditional Retirement Accounts (401(k), IRA)

Investing in these types of accounts allows you to make pre-tax contributions so your investments can grow tax-deferred. This feature makes them ideal for long-term savings. A traditional 401(k) will likely be tied to your employer, while a traditional IRA is going to be in an independent account that you can invest in outside of and in addition to the traditional 401(k).

Income-Producing Assets

Assets that produce income can be ideal for traditional retirement accounts. This income is typically generated through dividends or interest payments. Can also be referred to as “fixed income” securities. Holding them within tax-deferred accounts minimizes the impact of taxes on income returns and can potentially offer the benefit of compounded growth when held over a long period of time.

Target-Date Funds

Designed to adjust their asset allocation over time, target-date funds are suitable for hands-off investors saving for retirement. Target-date funds are commonly placed in retirement accounts, offering built-in diversification that evolves as the investor approaches their goal date.

Roth Retirement Accounts (Roth IRA, Roth 401(k))

These accounts act as a tax-advantaged savings vehicle that allows individuals to make after-tax contributions, enabling tax-free growth and tax-free withdrawals of both contributions and earnings in retirement, provided certain conditions are met. Roth accounts can be beneficial for young investors who are now in a lower income tax bracket than they will likely be in the future.

Long-Term Growth Assets

Long-term growth assets can be ideal for Roth accounts. This type of investment, typically an equity, is expected to increase in value over an extended period. Investors in long-term growth securities usually focus on capital appreciation rather than immediate income.

Taxable Brokerage Accounts

These accounts allow individuals to buy and sell a variety of securities without tax advantages, with any earnings subject to capital gains and income taxes in the year they are realized. Examples include an individual account, a joint account, and a trust.

The best investment in these accounts depends on your goals for your wealth. Long-term investors may favor growth assets, while short-term investors may favor safer, lower-risk assets to preserve capital. Investors may consider the time horizon of their financial goals and tax implications of this type of account.

Asset Classes and Diversification

A well-structured portfolio includes exposure to different asset classes, which helps balance risk and returns. The webinar outlined the key asset classes young investors should understand and incorporate into their portfolios.

U.S. Equity

Investments in U.S.-based companies can offer growth potential. These assets can experience higher volatility but also provide potentially robust long-term returns. These include large-cap, mid-cap, small-cap, and micro-cap equities, all of which have varying degrees of expected risks and returns.

Non-U.S. Equity

International equities add geographic diversification to your portfolio. Exposure to emerging and developed markets outside the U.S. can help mitigate risks associated with a single country’s economic conditions.

Fixed Income

Fixed income, including government bons, corporate bonds, and municipal bonds, can provide income and stability, potentially offsetting the volatility of stocks. They can be useful for risk management, especially as investors approach retirement or seek predictable cash flow.

Cash

Cash carries the risk of inflation eroding purchasing power, potentially resulting in lower returns compared to other investment options. While it is useful to have some amount of cash within your savings and checking accounts, investors could be missing out on opportunity to optimize their wealth if they hold it all in cash.

Understanding Your Risk/Return Profile

Each asset class carries a unique risk and return profile. During the webinar, we emphasized the importance of understanding your personal risk tolerance and aligning your portfolio accordingly. A balanced portfolio should reflect both your comfort with market volatility and the timeline for your financial goals.

Investment Strategies: Offensive vs. Defensive Approaches

The webinar covered two primary portfolio strategies: offensive and defensive. Both approaches play important roles in helping an individual reach their long-term financial goals.

Offensive Investment Strategies

Offensive strategies focus on aggressive growth. They include maxing out retirement contributions, regularly contributing to investment accounts, and allocating wealth towards equities. These strategies are useful to investors with a longer time horizon, who can withstand market volatility. They are best for investors who have a long-term outlook, the goal of capital appreciation, and are comfortable with taking risk.

Defensive Investment Strategies

Defensive strategies emphasize capital preservation and stability. Their goals include protecting assets for the near-term use and including shielding assets from volatility, usually by allocating investments toward fixed income. These strategies are suitable for investors approaching retirement or those who prefer consistent, predictable returns.

Conclusion: Action Steps for Young Investors

The webinar concluded with actionable steps for young investors to build a foundational portfolio:

  1. Determine which accounts you already own, and which you want to open.
  2. Decide how much you want to contribute to your account, and how often.
  3. Discover your risk profile and develop a long-term plan.
  4. Know the investment options available to you. Diversification is your friend!

Building a solid investment portfolio takes time, patience, and strategic planning. At Chicago Partners Wealth Advisors, we’re here to support you every step of the way. If you missed the webinar or want to learn more about our financial planning services, contact us today to schedule a consultation.


Important Disclosure Information

Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Chicago Partners Investment Group LLC (“CP”), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from CP. Please remember to contact CP, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. CP is neither a law firm nor a certified public accounting firm and no portion of the commentary content should be construed as legal or accounting advice. A copy of the CP’s current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request.