Recognize Your Options for Each of Your Investment Goals, then Craft a Portfolio for Each

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Recognize Your Options for Each of Your Investment Goals, then Craft a Portfolio for Each

Before building your portfolio, consider the special vehicles you can use for each goal. They can make reaching that goal a whole lot easier.

Uncle Sam can help you

For example, let the IRS and your employer lend a hand with your retirement. Both 401(k) plans and some individual retirement accounts (IRAs) allow you to save for your retirement with pretax dollars. And employers often match some or all of an employee’s contribution to his or her 401(k) plan.

College planning has its own set of investment vehicles. Coverdell education savings accounts, 529 plans, prepaid tuition plans, and trusts can all play a part.

Craft a Portfolio for Each

Different goals require different portfolios and therefore they usually demand a distinct assortment of investments. Unless you plan to send your child to college at the same time you buy the new house, you’ll need the money for those goals at different times. One portfolio won’t serve both goals equally well because a portfolio should change shape as its goal nears. At that point, you should be protecting what you’ve made rather than trying to eke out further gains.

If you’re buying that house in three years but your daughter won’t start college for another decade, you should be conservative with your home investment and aggressive with your education one. And if you have children who will be starting college at different times, you’ll probably want to set up separate portfolios for each of them, too.

Take the following steps for each portfolio:

• Determine your asset allocation for each portfolio. Each portfolio will need a different mix, depending on your time horizon and final portfolio value for each goal.
• Conceptualize each portfolio. Figure out what types of investments will form the core of each portfolio and what, if anything, will fill out the edges.
• Draft an investment policy statement (IPS) for each portfolio. While many parts of the IPS may repeat from portfolio to portfolio—your investment philosophy may be the same regardless of the goal, for example—some parts will differ. Creating different statements for each portfolio makes monitoring each portfolio easier, too. Use an investment policy statement worksheet for each portfolio. You can download a PDF worksheet here.
• Select investments for each portfolio based on the criteria you laid out in your IPS. Choose your investments for each portfolio, then enter each portfolio separately into a portfolio tracking tool, such as those offered online by Morningstar. These tools allow you to enter many different portfolios. That’s enough for one retirement portfolio for you and one for your spouse, a college-savings portfolio for each of your kids, a home-buying portfolio, and even a "model" portfolio of investments you’d like to make someday.