Optimized Portfolio

Investing and Personal Finance

Beginners Start Here – 10 Steps To Start Building Wealth

Last Updated: 16 Comments – 6 min. read

I would have loved some sort of a roadmap laid out for me when I started over a decade ago. The goal of this page is to do just that, so that you can start building wealth today.

View this page as a reference sheet; a pathway along which you’ll progress; a general framework, from which the details branch off. I would suggest taking a brief look at all the steps first, and then slowly working through them in order. I’ll be updating and adding new resources below as things change. Links below will open in a new tab so that you can keep this page open. You can bookmark this page for later using Ctrl+D on Windows or Command+D on Mac.

Disclosure:  Some of the links on this page are referral links. At no additional cost to you, if you choose to make a purchase or sign up for a service after clicking through those links, I may receive a small commission. This allows me to continue producing high-quality, ad-free content on this site and pays for the occasional cup of coffee. I have first-hand experience with every product or service I recommend, and I recommend them because I genuinely believe they are useful, not because of the commission I get if you decide to purchase through my links. Read more here.

What Is the Stock Market?

Investing in the stock market is one of the most powerful and quickest ways to build wealth. First let’s explore that conceptual framework in which we’ll be working for investing:

1. Build an Emergency Fund

If you’re young, time is on your side. Compound interest and compound returns are extremely powerful over long investing periods, called your time horizon. Even if you’re not young, it’s never too late to get started. But before jumping into investing, you need to save up 3-6 months’ expenses in an emergency fund for a rainy day. Don’t worry, you can invest your emergency fund:

2. Pay Off High-Interest Debt

It doesn’t make sense to start investing if you’ve still got high-interest debt like credit cards. Pay those off completely after establishing an emergency fund.

3. Pick a Broker and Open an IRA

After that, you want to open up a tax-advantaged account like a Roth IRA to avoid having to give money to Uncle Sam unnecessarily. I compared Traditional and Roth IRAs here.

Hopefully you also have a 401(k) account available through your employer. Try to max out contributions to those. While you’re at it, you can see if your 401k investments are optimized with a free analysis from Blooom here.

You have to open up an IRA and access the stock market through a broker. Personally, I like M1 Finance. But I compared some others below:

Also open up an HSA (Health Savings Account) if you can.

4. Choose an Asset Allocation

Now that you’ve opened an investment account, it’s time to choose what to invest in. But before that, the more important choice is your portfolio asset allocation, the ratio among different asset types like stocks, bonds, gold, etc. based on your time horizon and tolerance for risk. Here’s how to choose an asset allocation:

5. Choose Assets (Use Index Funds!)

Finally, the fun part! Now you pick what you want to invest in. While picking individual stocks like Amazon, Apple, etc. may seem attractive, that’s objectively not the best approach.

The evidence has shown that even most professional investors can’t pick winners that beat the market over 10+ years, much less the average retail investor like you and me. On the 50th birthday of the S&P 500 index, only 86 of the original 500 companies remained. Blindfolded monkeys randomly throwing darts for stock picks have beaten top hedge fund managers not just once, but consistently. Successful day traders are extremely rare. A little speculation/picking is fine to keep things fun, just don’t do it with the bulk of your portfolio. This is why broad index funds like VOO and VTI are recommended so often.

To keep things interesting, you can put some picks at no more than 10% or so of your total portfolio if you want. Thankfully, this is extremely easy to set up with a broker like M1 Finance.

What about picking sectors like tech, financials, health care, etc?

Betting on sectors increases uncompensated risk – additional risk without an increase in expected return. You’re increasing your chances of underperforming the market. Some sectors will outperform and some will underperform. How do you know which ones will do which? And during what time periods? What about different economic cycles? Tech has had a huge run recently. Will it continue?

Again, stock picking doesn’t work. Sector bets are just stock picking lite – one small step removed. Buy the whole haystack instead of trying to find the needle. You get exposure to the success of any sector at any given time in a market index fund, while eliminating sector risk.

So now that you know why index funds are superior to stock picking and sector bets, you still have some choices to make. You can choose your own index funds, or if you don’t want to even worry about doing that, use a lazy portfolio. Invest early and often, and don’t try to time the market.

6. Diversify

Those with a shorter time horizon or a lower risk tolerance may want to diversify with other assets like bonds, REITs, and gold:

7. Invest in a Taxable Account

Maxing out your tax-advantaged retirement accounts is a great problem to have. After that, you can put any extra money in a normal taxable brokerage account. Investors wanting to invest to supplement their current income will also want a taxable account. Here’s how to invest in a taxable account in a tax-efficient way:

The 6 Best ETFs for Taxable Accounts (3 From Vanguard)

Income investors may have a different goal:

The Best M1 Finance Dividend Pie for FIRE & Income Investors

Don’t forget to harvest losses each year to defer taxes on gains and reduce taxable income.

8. Tweak as You See Fit

After you’ve got some experience under your belt (and new knowledge in your head), you may come across things like tilts and leverage. You can employ those things in your portfolio if you feel comfortable doing so:

9. Save Where You Can

Start trimming expenses and getting cash back wherever possible to maximize your savings and investment capital. Also manage all your subscriptions, have your bills negotiated for you, and track spending with Truebill.

10. Sit Back and Relax, and Rebalance Annually

Don’t try to time the market. Buy and hold. Stay the course. Ignore the short-term noise. Invest regularly. Check your biases. Stick to your investment policy statement. Sit back and watch your portfolio grow, and rebalance it annually. Rebalancing refers to buying underweight positions and selling overweight positions to get your portfolio back to its target asset allocation.

For example, suppose you have a portfolio of 50% stocks and 50% bonds. If after one year your stocks position increases in value by 10% and the bonds position decreases by 10%, the asset allocation after one year will be 55/45. Rebalancing sells the 10% in stocks and buys 10% in bonds to get you back to 50/50. Only do this after 366 days in a taxable account to avoid short-term capital gains taxes.

Thankfully, M1 Finance has a cool dynamic rebalancing feature, automatically directing new deposits to underweight assets to keep your portfolio on track without having to manually rebalance. If you need to manually rebalance, they have a 1-click “Rebalance” button that keeps things easy.

Don’t want to do all this investing stuff yourself or feel overwhelmed? Check out my flat-fee-only fiduciary friends over at Advisor.com.

Disclosures:  I am long VOO in my own portfolio.

Interested in more Lazy Portfolios? See the full list here.

Disclaimer:  While I love diving into investing-related data and playing around with backtests, I am in no way a certified expert. I have no formal financial education. I am not a financial advisor, portfolio manager, or accountant. This is not financial advice, investing advice, or tax advice. The information on this website is for informational and recreational purposes only. Investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. Do your own due diligence. Past performance does not guarantee future returns. Read my lengthier disclaimer here.

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Don't want to do all this investing stuff yourself or feel overwhelmed? Check out my flat-fee-only fiduciary friends over at Advisor.com.

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Comments

  1. Really love the content and the YouTube videos. That said, I have yet to see a video capturing your investment style or portfolio. Is that by design? Just curious.

    Reply

  2. It was a great day when I found your site. Thank you.
    I am 73yo my IRA is in cash since 2020.
    Volatility is unnerving at this time.
    Advisors I have met with advise getting into various funds and hold.
    Are several short term treasury funds a better option or where can I look for more advice.
    Again TYVM.

    Reply

    • Thanks for the kind words, Robert! I can’t provide personalized advice. I bonds, short TIPS, and T bills are about the safest things one can buy. They are all forms of U.S. government bonds.

      Reply

  3. Great Read. I do have a question on my situation. I am 50 years old, a 100 percent service connected disable veteran who pays no taxes. So. My monthly income is $3,332 plus Social Security of $1,494 equaling $4,826 per month tax free. I own a Home and again pay no property taxes. I have No Bills and have your typical bills to pay Phone, Electric, groceries totaling under $2000 a month. Also, $150,000 in the Savings account. So, do I still need a Roth IRA? I keep reading how REIT’S are the way to invest.
    What would you suggest as a Veteran to do in my situation on investing? And what Brokage to use.
    Thank You, Stephen

    Reply

    • Thanks for sharing, Stephen. An IRA provides tax-free growth so it’s usually a no-brainer for most. I can’t provide personalized advice though. Consider sitting down with a financial professional for an hour or so.

      Reply

  4. Thank you for sharing the strategies and executions options on this site, It is not everyday that we get to read well thought out and thought provoking articles that are not about making a buck for the content producer.

    I was wondering if you have considered using futures contracts instead of leveraged ETFs as a way of avoiding volatility decay.

    Reply

  5. First, I want to take you for all your work. This is a really great thing you have put together. I have used a couple of different ones of these portfolios in my traditional IRA and 401k accounts
    I have a Roth IRA and want to set up a “set it and forget it portfolio” My question is are there any portfolios that are geared to the ROTH IRA meaning makes good use of the never pay any taxes on gains. I know most portfolios want to go to the best tax advantaged ETS and funds. I would like to take advantage of this perk of the ROTH. Sounds kind of strange I want higher frequency trading, no tax advantage and more income dividends. But I most want lower volitivity Like we get in the Index’s
    . Is this even possible?
    Thanks again Greg

    Reply

    • Broadly speaking, any Value- or dividend-tilted portfolio is better suited for a tax-advantaged account, so Ben Felix, Merriman, Swedroe, Ginger Ale, Maurer, Vigorous Value, etc.

      Reply

  6. Thank you for all your hard work because I have been searching for months for what you have answered in minutes! You say to “max out contributions to 401K” (assuming it’s a quality one). However, if one does not have index funds to choose from the ESP, would not he/she be better off to only contribute to the “matched” amount and invest in index funds elsewhere?

    Reply

    • You’re welcome! Glad you’ve found it useful.

      To answer your question, not really, unless you can open a Solo 401k or SEP IRA with self-employment income. Can’t really get the $19,500 of employee tax-deductible contributions elsewhere. IRA limit is $6k. Ideally, one would take full advantage of that tax-advantaged space every year.

      There’s no way to create a diversified stocks/bonds portfolio with the funds available in your 401k? Plans are required to provide at least 3 investment choices, and the plan sponsor is held to the fiduciary standard.

      You could also check the rollover eligibility requirements from the 401k plan sponsor, as then you’d be able to put those funds in your IRA and invest in whatever you want. You’re allowed one 401k rollover every 12 months, but most plans require termination of employment to be eligible to withdraw.

      Reply

      • Ok I realize that the tax advantage is worth it! I just want to be sure that the funds available are as good as the ones you and other portfolios on the site have. My ESP offers VTIAX (Total Int’l Stock Index), VPMAX (US lg blend), and VIMSX (US Small and Mid Cap Index). Additionally, I have $450,000 to invest in mutual funds, so I’m trying to aggressively allocate my investments (I’m debt-free). You mention VOO, VIOV, VEA, VWO, and AVDV but of course those aren’t available in my ESP. Should I contribute to these 3 ESP or just one or two and allocate the rest to the suggested ones for the aggressive allocation?
        Thank you for all your time!

        Reply

        • So all those mutual funds should have ETF equivalents. Off the top of my head without looking them up, VTIAX is VTI, VPMAX should be VOO, and VIMSX should be VO. ETFs aren’t more “aggressive” than mutual funds; they’re just slightly different vehicles.

          Reply

  7. Great website John!
    You are spreading knowledge that has taken me years to learn and I’m still learning new things here.
    Just like you I like to backtest. “Past performance doesn’t guarantee future …” Yes … But it does give an idea.

    I’m now wondering if Bitcoin is ready to become part of one of the diversification elements. It’s being mentioned and if enough people believe it to be the ‘ potential saviour for hyper inflation’. The big issue here is that we don’t have data to backtest.

    What is your view on this?
    And when taking the historical data issue out of the equation, would you consider Bitcoin as a potential portfolio diversifier?

    Reply

    • Kris, thanks for the kind words!

      Admittedly I don’t know enough about the nuances of Bitcoin to intelligently comment on it much. But broadly speaking, so far, like gold, it is neither a reliable medium of exchange nor a stable store of value due to its extreme price volatility, and it is not a value-producing asset like stocks and bonds, therefore we would expect it to have a long-term real return of zero. While it’s not a commodity, I delved into this idea a bit here.

      So for me, like gold, Bitcoin has no place in my long-term investment portfolio.

      In general too, the future of Bitcoin is quite uncertain, and seems highly dependent on its acceptance, legality, and widespread adoption despite its shortcomings of being a decentralized currency. As a medium of exchange, so far it only seems to appear attractive to those wanting to keep their transactions anonymous. Any bets on it are pure speculation, and I try to leave speculation out of my portfolio as much as I can.

      But is it possible that Bitcoin still offers some volatility and risk reduction in a broadly diversified portfolio? Absolutely. So just like gold, that alone may warrant its inclusion for the risk-averse investor.

      Reply

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