BUILD YOUR PORTFOLIO
Step 1: Set specific goals.
Before creating a portfolio, think about why you’re investing in the first place. The more specific each goal is, the better you can decide which investments may be right for you. Start by answering these questions:
How much money will you need? Remember to account for inflation when planning future expenses.How much time do you have? When will you need the money? How long will it need to last? As a rule, goals with longer timeframes require more aggressive investments.How much risk can you tolerate? All investments involve risk. The key is to assume enough risk to grow your portfolio, but not so much that you can’t tolerate the market fluctuations.
Step 2: Allocate your assets
Asset allocation is simply the process of deciding how much money to put into each of the three main investment categories:
Stocks to grow your principal and beat inflation over timeBonds to generate income and offset stock market risks Cash to meet short-term needs and provide portfolio stability
Asset allocation seeks to avoid the risk of owning just one type of investment. Because different investments don’t always move in the same direction, you have the potential to offset any losses from one holding with gains from others.
Your exact allocations depend on your unique needs. For example, if you have the time and temperament to ride out market fluctuations, a stock-heavy portfolio may make sense. As you grow older or more conservative, you may want to gradually increase bond and cash positions.
Step 3: Diversify across investment styles
After allocating assets into each investment category, the next step is to diversify across their various sub-categories, known as "investment styles."
Each of these investment styles tends to react differently to market and economic conditions. When some are rising, others may be falling. As a result, a broadly diversified portfolio is likely to fluctuate less than any one style alone.
Step 4: Select your investments
Instead of building a portfolio with individual stocks, bonds and cash securities, many people find it easier to simply invest in mutual funds.
Mutual funds are managed by professionals and diversified across more securities than you can likely afford to research, buy and manage on your own. It isn’t unusual for a single fund to include hundreds of different holdings so that no one security has too much influence on your total returns.
Step 5: Follow your plan over the long term
Many people make the mistake of switching investments or completely abandoning their portfolio during normal market swings. In most cases, a better approach is to simply buy and hold the same sound investments over time. If your personal circumstances or the financial markets don’t change dramatically, then neither should your fund mix.
Consider meeting with a financial advisor at least once a year to review your portfolio. Together, you can decide if your current investments are still appropriate or if any adjustments are needed.