Why should you learn the investment portfolio basics? Establishing and nurturing a well-thought-out investment portfolio is the key to becoming a successful investor. You need to understand you own investment goals, as well as the strategies you need to meet those goals. There are four fundamental steps to building a profitable investment portfolio.
Investment Portfolio Basics (Steps)
Each step contains tried and true investment portfolio basics that work, so you can start reaching your investment goals today.
Step 1: Determine Asset Allocations
It’s important to consciously design your portfolio using thorough research. Conduct an honest assessment of your situation before you move forward with any new purchases or transfers. Here are some important questions you should ask yourself:
- Age – How long do you want to grow your investments?
- Available Capital – How much can you invest comfortably?
- Future Capital Needs – What are your major capital needs, like college tuition or retirement, and how soon will they occur?
- Personality – How much are you willing to risk?
- Risk Tolerance – Do large losses cause you to experience more stress than the comfort of large gains?
Of all these factors, the final one is the most important, because it defines you as a conservative or aggressive investor. Aggressive investors are able to bear more risk, either because of their age, total assets or personality. They tend to divide their investments in order to focus more on equities, as opposed to bond or other securities.
On the flipside, a conservative investor protects the overall value his or her capital above all else. Older people getting ready for retirement, or those without the asset flexibility to withstand a large loss often use this model. Conservative portfolios focus more on fixed-income assets, like bonds and less on equities, although they may devote up to 20 percent of their capital to the latter. Read more: What’s Lazy Portfolio is? Is this Low-Risk Strategy right for You?
- Real more: How to Invest in Real Estate (The Basics)
There is also the option of allocating your portfolio in a moderately aggressive manner, which may suit you if you are a newer investor who is not ready to take the big leap, but you have the demographic factors that allow you to maintain a more aggressive portfolio with good success. The most important advice is to understand the investment portfolio basics before you begin. The best places to start are “Investing: The Basics”, and “Investing Styles: Find Your Best with 5 Key Questions”.
Step 2: Take Your Portfolio from Design to Reality
You can simply take the portfolio you designed in Step 1 and recreate it; however, you may not want to stop there on your investment portfolio learning curve. If you handle them properly, the broad asset classes breakdown even further, into subgroups that can increase or decrease your relative risk and return.
There are four asset classes, and if you look at each one individually, each enables you to control the particulars of your portfolio. The four asset classes include:
- Mutual funds
- Exchange-traded funds (ETFs)
A good portfolio, regardless of its risk level, needs to include some representation from each asset class for the best level of diversification. However, successful long term investing also requires diversification within each asset class, including different subsection and industry investments. For example, bonds may be either corporate or government issued, and either short or long term.
Remember, investing successfully involves time, not just money.
Choosing the assets for your portfolio, especially on the micro level, is a lot more than simply ticking boxes, following a hot tip, or closing your eyes and pointing. Gaining maximum return means analyzing each element of your portfolio. You must systematically inspect each stock and bond for its health and potential over the term in which you intend to invest. Because these answers are highly individualized, they relate closely to the amount of research you do, and/or the expert advice you get. Remember, investing successfully involves time, not just money.
- Read more: Alternative Investments and Your Portfolio.
Step 3: Reassess Your Strategy
No matter how carefully you plan, you can’t guarantee that your portfolio allocations will work out. Investment portfolio basics are important: markets change, as do personal situations. As a result, it is imperative that you check in on your strategies and reassess their effectiveness regularly. This means considering your overall asset allocation strategy, shown in Step 1, as well as looking at the individual assets and securities you purchased from Step 2.
The reassessment process begins by looking at overbalanced and underbalanced areas of your portfolio. Which areas are producing better than expected? Which areas have increased in risk, and are you comfortable with that risk? Your situation is also important. Go back to Step 1 as if you are a beginning investor, and then compare your allocation results now to the realities of your portfolio, making adjustments accordingly.
Step 4: Rebalance for Maximum Growth
You can rebalance your portfolio by recreating the actions in Step 2. Next, use the answers you gained in the reassessment period in Step 3, as well as your own current research. Be sure to examine the latest trends and expert advice, and then handpick as many new assets and securities as you need. You will also want to reallocate your money across all four asset classes.
Remember, this step is not a reason for giving in to temporary swings in the market. These are normal, and will even out over the long-term. The rebalancing process should be all about you, your position as an investor and as an individual. It should also be about the specific, long-term performance of specific equities within each asset class.
If you made the mistake of investing in some hot stock that underperformed, take the time now to consider cutting your losses, but don’t pull out of the market altogether. By systematically examining your portfolio, you will have a much better chance of investment rewards.