This guide will explain to you the basics of creating a simple passive investment portfolio.
Please note that a “simple” passive investment portfolio does not mean an underperforming portfolio. Actually, portfolios built with a limited selection of broad index funds often perform better than more sophisticated portfolios. They cost less and are highly diversified.
In this guide, we will only focus on portfolios that include public equities (stocks) and fixed income (bonds). These are liquid asset classes that are accessible to any type of investor all over the world. By limiting the number of asset classes, the portfolio will also be easier to manage.
We will not discuss alternative investments in illiquid asset classes, such as private equity or private real estate. Even though alternative asset classes have high performance, they are not easy to manage. They require specific knowledge, have high transaction costs and minimum investments. Moreover, you really don’t need them to build a diversified investment portfolio that can do well in time.
The 6 steps to build your passive investment portfolio like a pro
- The first step in building your passive investment portfolio is to determine your target asset allocation between stocks and bonds.
- The next step is to decide whether you want to adopt an active or passive investment style. Passive investors track market indexes. Active investors hand pick investments (or investment managers), hoping to beat the performance of market indexes. In this post I focus on the advantages of passive investing. Indeed I believe that passive investing will serve most people better than active investing, and deliver higher returns.
- The most exciting part of our investment journey is to select our investments. In this post, I cover the main equities and bond market indexes.
- After selecting the investment in your portfolio, you need two know two basic principles to manage it in the long run.
- Lastly, I thought it was important to share how I have built my investment portfolio. I leveraged broad passive investment funds, but also integrated Environmental, Social, and Governance (ESG) considerations to reduce my climate footprint.
After reading this guide, you will learn the basic building blocks to build a passive investment portfolio. You will understand the benefit of passive investing, learn which are the major market indexes that you can track in your portfolio, and be able to manage your portfolio in the long run!