How do I create a custom portfolio?

Guideline gives you the ability to create your own custom investment portfolio by choosing from our carefully vetted menu of low-cost index mutual funds. We recommend this option only if you are an experienced investor or if you feel comfortable making investment decisions for yourself.  

You should take the following factors into consideration when customizing your portfolio:

1. Your Age and Time to Retirement

The amount of time left until you retire may be the most important factor to consider when deciding how to allocate your portfolio investments. Volatility, or the degree of fluctuation of a given security’s price over time, is a bigger risk in the short-term than in in long-term. For example, if you’re retiring in 30 years, the volatility of your investments will have less of an effect. Your portfolio would have plenty of time to recover and bounce back if a market crash were to occur. But, if you’re retiring in five years, a market crash or recession could make or break the amount you end up having in retirement. A crash so near to your retirement could mean that your account doesn’t have time to bounce back and provide you with the funds you need.   

The following are general guidelines on how to apply time until retirement to your asset allocation:

  • 5 years or less until retirement: a more conservative portfolio of mostly defensive assets, such as cash, bonds, and alternatives.  
  • 5-10 years until retirement: a healthy mix of both defensive and growth assets will continue to grow your portfolio while still reducing volatility.  
  • 10+ years until retirement: a more aggressive portfolio of mostly growth assets, such as stocks, since there’s plenty of time to recover from any short-term market volatility.

2. Your Emotional Risk Tolerance

Emotional risk tolerance digs into how your emotions affect your investment making decisions. You should assess whether or not you’re prone to worry over dips and fluctuations in the market, or if you tend to make poor financial decisions when faced with large financial loss or gain.  

Ask yourself the following questions as you’re building your own portfolio:

  • Can you stick to the plan based on your time horizon and current assets?  
  • Will you get carried away and sell when there is a market panic?  
  • If you see a particular investment making a ton of money, are you inclined to pour all your money into that one holding?  

If any of this rings true for you, it’s important that you choose a portfolio that will not be too volatile in the short term. It’s better to sacrifice a bit of long term return than to let your emotions bamboozle you into making a bad investment decision.

3. Diversification

It’s always important to diversify within your portfolio, regardless of how aggressive or conservative you want it to be. Basically, the old adage rings true: Don’t put all of your eggs in one basket. Different investments and markets can fluctuate independently of one another, and it’s not wise to bet your retirement on any single asset or asset class.

All Guideline managed portfolios include a proportion of investments in each of the following asset classes:

  • US Large Cap Growth
  • US Large Cap Value
  • US Mid Cap
  • US Small Cap
  • International Developed
  • Emerging Markets
  • US Government Bonds
  • US Corporate Bonds
  • International Bonds
  • Real Estate

If you are customizing your own portfolio, we suggest that you diversify in a similar fashion. At the bare minimum, you should have a mix of both growth (e.g. stock) and defensive (e.g. bond) assets to suit both your time until retirement and emotional risk tolerance.  

For more direction, please refer to this guide by The Securities and Exchange Commission which discusses asset allocation, diversification, and rebalancing.

4. Cost

Finally, cost is an important factor to consider when choosing the investments to hold in your portfolio. The reasoning is simple: the more an investment costs, the more the investment company will take out of your portfolio returns. That means less money for you in the long run.  

It’s important to understand the difference between active and passive investment management and how these two styles affect cost.

Active investment managers typically buy a basket of stocks for a portfolio and continually buy and sell stocks for that portfolio based off of information they believe makes certain investments or market sectors exploitable. Because of the level of labor involved, active managers tend to charge a higher expense ratio. Passive investment managers, on the other hand, believe that the market is generally efficient and unexploitable. Passive managers buy investments that correspond to a market index and let them grow long-term. Because passive managers are not constantly manipulating their fund portfolios, they charge much less in the form of expense ratio.      

The problem with actively managed funds is that they don’t “beat” the market all the time. No one can predict the future, not even the most experienced investors! At Guideline, we believe proper asset allocation is the most important way to grow your portfolio in the long term, and we choose passively-managed index funds for our managed portfolios. We encourage you to follow suit. Research backs us up, with studies showing that asset allocation is 90% responsible for investment performance. Low-cost, passively managed index funds will generally come out ahead due to less money coming out of your returns. This makes an exponential difference in the long term with the powers of compounding.

That being said, Guideline does offer a small selection of actively managed funds at a higher cost. These funds have been carefully vetted for other criteria such as risk, performance, and asset allocation in comparison to their peers. But, since Guideline carefully vets each investment in its menu for the same criteria, we urge you to consider cost as the most important factor when selecting investments for your portfolio.

Creating Your Custom Portfolio

If you’re already a Guideline participant and you’re interested in creating your own portfolio, you can do so by clicking on “Change Portfolio” in Your Portfolio. From there, you can click on Create a Custom Portfolio at the bottom of the page.

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