Table of Contents
Successful investing starts when an investor starts to build an investment portfolio and keeps some of their income in a savings account. That truly sounds like a good idea, doesn’t it?
Investing doesn’t mean working towards specific goals; in fact, it includes short-, mid-, and long-term financial goals. However, finding the answer to how to build an investment portfolio to reach these goals can be a daunting task.
Let’s better understand this with the help of the basics of investment portfolios and their importance.
What is an Investment Portfolio, and Why is it Important?
An investment portfolio refers to a group of financial assets carried by an investor, which includes stocks, bonds, cash and cash equivalents, currencies, and commodities. Furthermore, it is a group of investments an investor uses to earn profit while ensuring that assets or capital are secured.
Now comes the biggest question – why is it important to build an investment portfolio?
Investment portfolio offers:
- A conducive framework for your money
- Helps you oversee and manage the money you invested.
- Better asset allocation
- Spread your risk factor across various investments like stocks and bonds.
How to Build an Investment Portfolio in 9 Easy Steps
How to build an investment portfolio is the key question and always remains a highlight for keen and active investors. So, let’s look into them:
1. Jot Down Your Financial Goals
The very first step in the process – how to create an investment portfolio is to prepare a list of your financial goals.
After preparing the list, sort them by time horizon, where you’ll keep all your investments and only use them when required. These financial goals are divided into three categories:
- Short-Term Goals: Where you require the money within six months or one year
- Mid-Term Goals: These goals take between one year to five years to accomplish
- Long-Term Goals: These require more than five years to get accomplished
2. Before Prep is a Must!
Determining your present financial position is a crucial step in building an investment portfolio. This includes jotting down assets like mutual funds, bonds, property, cash, etc., and liabilities like student loan debt, credit card dues, debt, etc. This balance sheet of assets and liabilities will provide you with a clear vision of your net worth and act as a benchmark for constructing your financial future.
3. Reduce Investment Turnover
Investors usually like to buy and sell stocks within a short duration. They need to recall that buying and selling of stocks escalates transaction costs. In addition, some investments take time before paying off the debts.
4. Choose Your Investments Wisely
Now, it’s time to look for various investing options where you could invest your money to earn huge returns. You could invest in bonds, stocks, funds, cash, and cash alternatives (including Saving accounts, money market funds, and CDs) and other alternative investment options such as real estate, gold, hedge funds, cryptocurrencies, and commodities like wheat to immensely diversify your portfolio.
5. See that Your Account Type Matches Your Goals
Don’t you require a perfect place to keep all your investments? You’ll definitely do! That’s why you want to create an investment portfolio with an account that perfectly matches your investment goals.
- Taxable online brokerage accounts work excellently for medium—and long-term goals where you want more potential than a lower-risk deposit account.
- Tax-benefit accounts like 401(k) and IRAs work ideally for long-term financial goals and can accommodate various risk tolerance levels.
- Deposit accounts such as high-yield savings and money market accounts are idle for short-term goals that offer growth and security.
Check out Different Savings Account Options in the USA
6. Build an Emergency Fund
Building an emergency fund could become a lifesaver jacket for you and your family, safeguarding you from any unforeseen events. These events could be home repairs, job loss, a major accident, or any medical emergency. An emergency fund should include the expenses like:
- Mortgage payments
- Living expenses
- Insurance costs
- Minimum payment of credit cards
- Fixed payments, including car loans, student loans, house loans, etc.
- Utility costs
Some great investment options for stashing emergency funds are liquid mutual funds, money market instruments, overnight funds, and savings accounts.
7. Don’t Depend Much on Single Investment
You might have heard the famous saying, “Don’t put all your eggs in one basket.” Yes, it’s right! Diversification in investment is a key to a successful portfolio.
Diversifying investments can be beneficial for you in manifold ways. It can save you money if your other investments are not performing well and providing huge returns. Other investing options may open the door to new and safe opportunities for you that reduce the financial risk factor for investors.
8. Understand Your Risk Tolerance
You need to decide your risk tolerance level – how much you can probably lose in the short span to attain each goal.
Risk tolerance walks parallel with the time horizon. For example, if you take a small risk when doing retirement savings (30 years before your retirement), you might fall behind in your saving goal. On the contrary, if you’re five years away from your retirement, taking huge risks could push you into darks, which results in losing money.
Thus, risk tolerance is a balance between what you need to achieve your goals and how challenging it is to take market risks and swings.
9. Check, Rebalance, and Make Appropriate Adjustments
As we move ahead in the guide – how to create an investment portfolio, buying your preferred investment portfolio requires attention and care. Therefore, it’s necessary to adjust and check your portfolio regularly.
You might walk through your portfolio twice or thrice a year to make sure that all your assets are aligned properly with your goals. If the market is volatile, you may need to rebalance your holdings. Moreover, if you’re making investments via a robo-advisor, the robo-advisor will take care of rebalancing your account.
Nevertheless, you may need to adjust and change your investment strategy during different stages of life, such as getting married or becoming parents, getting divorced, or stepping closer to retirement. All these events compel you to contemplate and change your ongoing investment strategy.
Types of Investment Portfolio
Investment portfolios come in manifold types depending on the investment strategies. Some common types of investment portfolios that investors must consider are:
Income Portfolio
An income portfolio focuses more on protecting a regular source of income from investments than potential capital gains. The best example of an income portfolio is buying stocks based on their dividends rather than on a history of escalation in share price.
Growth Portfolio
The major aim of a growth portfolio is to boost the growth of an investment portfolio by taking huge risks, such as investing in growing industries. These portfolios offer concurrently higher potential risk and higher potential rewards.
Value Portfolio
In value portfolios, an investor benefits from purchasing less expensive assets through valuation. These are beneficial during challenging economic times when multiple investments and businesses struggle to stay in the race and survive in the market.
Speculative Portfolio
Speculative portfolios are the highest-risk portfolios of all types. This portfolio plays on stocks of healthcare and technological companies and Initial Public Offerings (IPOs) that are in the process of introducing new products that need funding.
Hybrid Portfolio
A hybrid portfolio provides great investment flexibility. It allows you to invest in other assets besides the stock market, like real estate and art. In addition to this, it also provides huge diversification across various asset classes that eventually results in market stability.
What’s Next?
Achieving your financial goals requires balancing financial risk against rewards. While you might find various ways to build an investment portfolio, there is no specific investing approach. Therefore, pick the right investment portfolio for you to rebalance or check your financial decisions.
To learn more about investment strategies, stay tuned with us and follow us on LinkedIn to get the latest updates.
Nevertheless, ensure that your investment portfolio should align with your investment horizon, risk tolerance, and financial goals to enjoy the best of both worlds.
Happy Investing!
