How to Build Your Investment Portfolio
Building and maintaining a well-researched financial portfolio is instrumental to success for anyone involved in investing, but for those just getting started, it can be hard to determine what decisions are the right ones. What goes into an investment portfolio? How should assets be allocated? How does diversity affect the quality of a portfolio? An investment portfolio should help its owner meet their future financial goals, so it’s important for a prospective investor to begin with as much information as possible.
Create a Unique Investor Profile
One of the best things to do before getting too involved in various investments is to establish an investor profile based on a personal risk tolerance and unique goals.
Determining risk tolerance generally involves the following considerations:
- Age. Younger investors have a longer timeline during which their money will be able to grow. Because of this, they are able to make riskier investments that wouldn’t set them as far back as an older investor.
- Timeline. When is the money needed? Investors seeking to earn money for a short-term goal may prefer more conservative, or safer, investments because they’re more likely to get the money they need by their decided deadline. Longer-term goals afford investors the luxury of riskier investing.
- Personality. How much risk can be stomached? For investors able to handle the most harrowing fluctuations in the market or the possibility of losing the entirety of their investment, more aggressive and riskier picks are doable. If these same fluctuations and possibilities make another investor’s skin crawl and their hair fall out from stress, much more conservative investment decisions are more appropriate.
It is often tempting to follow advice from friends and family with regards to risk and investments, but their goals may not always overlap. For example, someone might want to make an expensive purchase or start a business within a few years, which means they need a higher rate of return in a shorter amount of time. They might also just be looking to build a tidy amount of money for when they retire decades from now, which would change their options when investing money.
Financial goals and current established budget determine the ideal risk level of any investment portfolio, ranging from conservative to aggressive. The more aggressive the investment, the higher the risk and the reward.
Building a portfolio requires consideration about the best way to split the assets among stocks, funds, and bonds. Diversification is key, and investors can keep it as basic or as complex as they like. It is, after all, their money.
However, there is a lot of wisdom in tailoring an asset allocation based on specific risk tolerance and current income goals. People might opt for a simple strategic asset allocation, which targets a specific rate of return and then invests in stocks, bonds or funds that balance out to that yield based on previous performance.
There is no guarantee of gains, of course, and an investor’s financial goals may change. This means they might have to step outside of a rigid asset allocation. In that case, they could decide to switch up their investments from time to time. Eventually, experience may make it easier to go for a dynamic asset allocation, where the average rate of return is in regular flux based on the investments made.
How to Balance Investments
The more diverse the investment portfolio, the more spread out the risk. Individual stocks may be the riskiest type of investments, simply because the investor is relying on one company to succeed and the knowledge of the best companies to invest in. Funds can spread out the risk a little by investing in several stocks or bonds. Bonds are often the safest investments to make, depending on the organization that backs the bonds. With all investments, a higher degree of risk usually corresponds to higher rates of gain or loss.
General Investment Tips
Sending money out into the world is like a person taking their oldest child to kindergarten, but it’s better than letting the child stay home (or let the money sit in a savings account). It is really tempting to become a helicopter parent to the investments, but there’s a degree of risk in doing so. With a diverse investment profile, investors can vary the degree of risk with each investment. This can help to calm an itchy “must sell now” finger. Experts strongly recommend keeping one eye on all investments, but not to follow them so closely that they feel the pressure to buy or sell with the same money on a regular basis. Many investments can ride out minor bumps in the road. Paying restricted attention allows people to make a better decision about buying, holding or selling.
Simple Online Investment Tools
Ultimately, getting started in an environment that provides a little insurance against crashing and burning is ideal. No one wants to lose 30 percent of value on a first investment. There are several tools available to provide guidance in the types of investments to consider, or even to simplify the process of investing and managing a portfolio. Organizations like Personal Capital, SigFig, Betterment, and Acorns allow users to create a profile and start investing quickly. In some cases, investors can even set up automatic deposits or transfers so that the process is more automated and seamless.
Investing is like eating potato chips: people can’t just have one. With a varied portfolio of investment types in differing degrees of risk, a new investor can become experienced and better ensure a predictable gain over time or a building of equity in the instance of real estate investing. This will help to achieve personal financial goals, at a risk level that feels practical and appropriate.