Is a Bulletproof Portfolio a Realistic Option?

The idea of a bulletproof portfolio is something of a unicorn in the investing world. We'd all love to invest in a risk-free way that generated guaranteed wealth. Sadly, whether it's stocks, property, or something else, no investment is guaranteed -- the value can go both up and down. The trick is to understand what risk you're taking on and manage it as best you can.

What happens if you don't invest at all?

Before we explore the idea of a bulletproof portfolio, it's worth touching on what might happen if you don't invest your money. Investing involves buying assets that you believe will increase in value and provide returns over time. That could take the form of property, stocks, bonds, or commodities like gold.

The alternative to investing is saving -- putting your cash in an interest-earning bank account, such as a high-yield savings account or a certificate of deposit. It is tempting. Not only are some top savings accounts earning APYs of over 5%, investing also carries a lot of uncertainty. But savings carry a different (and arguably bigger) risk: Your money may not earn enough interest to keep up with inflation. You'd still have your money plus interest, but it wouldn't go as far. In contrast, historically, many investments have beaten inflation over time.

Three ways to build a resilient portfolio

I'll admit, with all the uncertainty in the world right now, I've been worried about buying stocks. Logically, I know it's better to jump in than wait on the sidelines. There's plenty of research that shows it's better to buy than do nothing, even if you buy at the wrong time. Sadly, we are human. That knowledge doesn't make it any easier to put money into my brokerage account when the headlines are saying the sky could fall. Here are some guardrails that have helped me continue investing.

1. Take it slowly

Vee Weir, Founder & CEO of Vee Frugal Fox says if you invest for the long term, there's a very strong chance you'll come out ahead. Not only that, but the power of compound interest means even relatively safe investments can produce solid returns. "The longer you hold, the higher the gain," she points out. Even so, she says nothing is guaranteed. "Like doctors, I legally and ethically can't say certain contraceptive measures are 100% effective, but I can say for certain contraceptives are 99.9% effective."

Weir compares index funds (a fund that tracks an index, such as the S&P 500) to contraceptives. "Will you lose money in the stock market if your investing strategy is long-term, buy and hold index funds? There's a 99.9% chance you won't," she says. According to Weir, if your money is in an index fund for just one day, you have around a 50% chance of a positive return. If you leave that money for 15 years, Weir says the probability increases to 99.9%.

Takeaway: Taking a long-term approach to your investments lessens the impact of short-term market fluctuations.

2. Build a diversified portfolio

This means having different types of assets across a mix of sectors, such as holding a mix of stocks, bonds, property, and commodities. The thinking is that if one asset class performs badly, you're insulated because you don't have all your eggs in one basket.

Similarly, if you invest in a mix of sectors, you won't be so exposed if one struggles. Let's say technology stock values plummet next week. If 80% of your money is tied up in tech, it will hit your portfolio hard. But if tech only makes up 10% or less of your investments, it won't sink your wealth-building plans. The great news is that you don't have to pick that mix of stocks yourself. About 70% of my portfolio is in index funds exchange-traded funds (ETFs) which spread my investments across a number of industries.

Takeaway: Diversification can help make your portfolio more bulletproof. Use index funds and ETFs to invest in a mix of sectors.

3. Choose low-risk investments, even if the returns are lower

News headlines are often filled with trendy ways to make money -- most recently, it's been cryptocurrency or AI investments. High-risk investments can generate high returns. They can also crash completely. For example, Bitcoin is worth around half what it was at its 2021 high, and many investors have lost money.

If you're uncomfortable with risk, opt for safer investments and let time do the heavy lifting. We've touched on index funds a few times, for example. An index fund that tracks the S&P may not be as sexy as cryptocurrency. But over the past 30 years, the S&P has delivered an average growth rate of 10.7% per year. Compounding -- earning interest on your interest -- can transform even a relatively small amount of money if you give it long enough.

I am super lucky because my grandparents put money into an index fund for me when I was a toddler. I didn't touch the account until much later in life when that cash helped me buy my own house. Let's say you earn a conservative 8% return on an index fund. This doesn't factor in inflation, but here's how $1,000 might grow to almost $50,000 if you give it long enough:

Takeaway: No investment is completely safe, but you don't have to take big risks to build wealth.

Bottom line

It may not be realistic to aim for a completely bulletproof portfolio. If you don't like taking risks, don't let that stop you from investing altogether. Instead, look at ways to build a diversified portfolio and avoid high-risk investments that promise higher returns.