An investment portfolio is a collection of assets that you can potentially earn returns on. It’s best to maintain a well-diversified investment portfolio with a variety of products in it. There’s a lot to consider as you’re building an investment portfolio, so you’ll want to think carefully about this endeavor so you can develop a plan that’s uniquely suited to your goals.
Set Financial Goals
Your investment portfolio is a means to an end. Before you build this portfolio, it’s crucial that you consider what that goal is. You can set up investment funds for more than one goal, but you still need to clearly define what each one is. As you evaluate your investment goals, you need to know:
- The term for the goal: A long-term goal will take place at least five years in the future. Intermediate-term goals require funds within two to five years, and short-term goals require cash in under two years.
- How much you need to generate: Whether you’re saving for your retirement, college education, or a new home, you should create a budget for your goal. Determine how much you need to have at that time so you can gauge how quickly your investments should grow for you to achieve that goal.
- What you can afford: How much can you put into your investments? The amount that you can afford to invest will determine how risky your portfolio needs to be in order to potentially reach your goals.
Evaluate Your Tolerance for Risk
The more risk you can comfortably handle, the more aggressive your portfolio can be. The higher the risk, the greater the chance that the investment won’t meet your expectations and will underperform or result in a loss of capital. A low-risk investment, by contrast, has a smaller chance of underperforming or causing a serious loss of capital.
The appeal of a high-risk investment is that it offers the opportunity for greater returns if it does perform well. Though you’re susceptible to great losses, you may also enjoy significant gains. Meanwhile, your low-risk investments probably offer less impressive returns. A low-risk investment may keep your money safe, but it won’t usually provide you with enough gains to fund your retirement or achieve other major financial goals. It’s generally best to diversify the risk in your portfolio, but you can skew it more toward high- or low-risk investments depending on your current goals and tolerance level.
Evaluating your goals, as defined previously, will give you a good idea of how much risk you need to take to potentially achieve your goals. There’s no guarantee of getting particular returns on an investment, but you will be able to see what percentage you need in order to achieve your goals with the funds that you have available. If this risk level is too high, consider finding creative ways to increase the funds available for your investment. You might try spending less on dining, gourmet coffee, entertainment, or other indulgences so you can put more into your investment portfolio.
Determine Asset Allocation
You can invest your funds in a variety of assets including:
- Mutual funds.
- Certificates of deposit.
- Real estate.
- Exchange-traded funds.
You can select these investments individually or choose a managed account that’s designed for your needs. These accounts will diversify your investments for you by channeling your funds toward a variety of options.
Some of the accounts that you might consider include:
- Standard brokerage account: A brokerage account typically includes stocks, bonds, mutual funds, and exchange-traded funds. Interest and dividends on these accounts are taxed the year the money is received. Most investors choose a cash account using their own funds, but you can alternately choose a margin account where you borrow money from a broker for your investments.
- Individual retirement account: An individual retirement account (IRA) provides a tax break either the year you make your contribution or at the time of your withdrawal. You can channel your IRA toward a number of investments.
- 529 savings account: Designed for educational expenses, this account offers tax-free distributions for money that’s used to fund continuing education.
Research Your Options
Get to know all the different investment options that are available to you. You can invest in a wide range of companies and products. The more informed you are, the better your chances of success. For example, if you’re purchasing stocks, you should evaluate the company’s stability, debt-to-equity ratio, and earning potential.
If you’re investing in real estate, you’ll want to research the market in the area where you’re purchasing property. You can typically fund this type of investment with a loan, such as a fix and flip loan. However, you’ll need to make sure that you can repay the loan, increase the value of the property, and turn a profit on your investment.
Consider Seeking Professional Advice
Building a well-rounded investment portfolio is a complex task. Fortunately, it’s not one that you need to tackle on your own. You can choose to handle all your investing independently if you have the time, knowledge, and energy to do so, but you can also seek assistance in a variety of ways.
One of the simplest options is to use a robo-advisor. This automated advisor will analyze your risk tolerance and investment goals and help you build a profile that loosely fits your needs. This is a good starting point if you want to make a small investment and pay very little for professional assistance.
If you’d like more personalized assistance with a greater level of expertise, you should seek an experienced financial professional who will assess your situation personally and offer custom recommendations that are built specifically for you. There’s no comparable substitute for the level of service that you can get from a live investment professional.
Building a strong investment portfolio that’s tailored to your needs can help you achieve a variety of personal goals. Create a thoughtful portfolio that will help you plan effectively for the future and you can start growing your funds now.
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