With so much information out there about finance and investing, it can feel like it requires years of formal education to even understand the basics. Though there is something to be said for working with a professional to handle the more complex aspects of your portfolio, building a portfolio that gives you the best chance of meeting your financial goals is actually quite simple. The following six tips on how to build a successful investment portfolio are easily accessible, but can have major impacts.
If you’re looking for assistance in creating a personalized financial plan, speak with a CERTIFIED FINANCIAL PLANNER™ professional at Good Life Financial Advisors of NOVA today!
Know Why You’re Investing
It may sound obvious, but knowing why you’re investing is the first step to building a portfolio. If you don’t know where you’re going, how can you possible expect to get there? Are you investing to fund a new home? Retirement? Providing for the next generation? What you’re saving for effects many factors, including your time horizon (more on that next). Another reason to know why you’re investing is that it can help you prioritize. If you’re investing to fund a retirement with your spouse that allows you to travel the world together, keeping this in mind can be great motivation for sticking to a plan and avoiding distractions.
Keep Your Time Horizon in Mind
Your time horizon is how long you expect to have your money invested. If you’re 25 and investing for your retirement, you’ll have a much longer time horizon than someone who is 60 and saving for retirement. Differing time horizons call for differing investment strategies. If you’re like many people, you’re saving for multiple goals with varying time horizons. For example, a couple may be saving for a new home in the next few years and retirement in 25 years. If this is you, you’ll want to make sure your portfolio gives you the best chance to meet all these goals. This is often accomplished by having different asset allocations for accounts with different goals.
Have the Right Amount of Risk
So how do you make sure your asset allocation is appropriate given your time horizon and other financial needs? Simple—you make sure you don’t take on more risk than is appropriate. All investing involves some amount of risk, but certain investments are riskier than others. As a general rule, bonds are a more conservative investment option than stocks. Within stocks, there are also various levels of risk. For example, blue chip stocks (certain large companies with good reputations) are more conservative than stocks of small, startup companies. The right amount of risk will depend on many factors, not least of which is your personal response to market ups and downs.
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You’ve likely heard the advice to diversify before—it’s investing 101. Diversifying keeps you from having all your proverbial eggs in one basket, which can help minimize unnecessary risk. But true diversification requires more than investing in multiple companies. A diversified portfolio is put together thoughtfully, and in order to be truly diversified, it should include investments that are different and move in different directions at different times. Holding five large cap stocks or stock funds may not be as diversified as you thought. When considering your plan for diversification, you’ll also want to take into account your time horizon and personal comfort level with market volatility.
Once you’ve created a diversified portfolio with an asset allocation that works for you, you’ll still need to periodically check in and ensure that your portfolio is still appropriate. People are often surprised to see that, over time, price changes cause the initial weightings of different assets to change. For example, if you have an initial portfolio with an asset allocation of 50% bonds and 50% stocks, if the stocks have stronger returns, you may soon end up with a portfolio that’s 40% bonds and 60% stocks. This would no longer be in line with the asset allocation you want. Rebalancing helps you maintain your desired asset allocation.
Time in the Market, not Timing the Market
This final tip may be the most important and most simple, but it is also often the most difficult to follow through on—don’t try to time the market. Unless you can tell the future, you can’t time the market. Instead, take the long view. You may need to occasionally sell certain investments for various reasons, but overall, a buy and hold strategy has proven far more successful than attempting to time the market. If you take this approach, it’s usually best to avoid looking at your portfolio too often. Reacting to the daily ups and downs is a sure-fire way to reduce your chances of investment success.
Seek Assistance from a Financial Advisor
We hope you’ve enjoyed these tips on how to build a successful investment portfolio. While designing an investment portfolio may seem simple, it is not easy. Investing is only one part of a financial plan, and your portfolio should reflect all of the components of your finances. If you don’t have the time to tackle this job, or would prefer to work with a professional, we’re here to help! Contact an advisor from Good Life Financial Advisors of NOVA today.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.