Building a portfolio from the ground up involves more than just buying the latest hot stock. To properly construct a long-term portfolio, you’ll need a framework to help ensure it accomplishes what you want.
If you have money to invest and want to start a brand-new portfolio, take a look at these tips that can help you create your strongest portfolio yet.
Tip No. 1: It Matches Your Investment Objectives
The road map for any portfolio begins with your investment objectives, which are stated goals that you want your portfolio to achieve.
In a generic sense, investment objectives are broken down into categories such as growth or income. For example, if you’re young and want to maximize your long-term earnings, you’ll want a large allocation of stocks or other investments that grow capital. If you’re retired, you might need monthly income rather than aggressive growth.
A strong portfolio is built around an appropriate asset allocation.
Tip No. 2: It’s Aggressive Enough
Even if your primary investment objective is income, being too conservative with your portfolio can be damaging.
Fixed-income investments such as bonds are subject to inflation risk, meaning your money won’t be worth as much in the future as it is currently. Say you put $10,000 into a 10-year bond. When you receive that $10,000 back at maturity, it won’t buy you as much as $10,000 did 10 years prior.
When it comes to investment strategies, many financial experts suggest that even conservative investors have at least a portion of their portfolio allocated to stocks.
Tip No. 3: It’s Diversified
Diversification is the cornerstone of a successful investment portfolio. It involves owning different types of asset classes — such as stocks, bonds or precious metals — along with different types of investments within each asset class, such as small-cap stocks, large-cap stocks and foreign stocks.
Mutual funds are a type of investment that can help provide instant diversification because they hold positions in hundreds of different securities. By varying your investments, different portions of your portfolio will be rising even if others are falling. Think of it like owning a fleet of trading vessels in the 1500s. If one of your ships were to sink or be attacked, the others would still make it through to their destinations.
Tip No. 4: It’s Inexpensive
Even the best portfolio won’t help you if you’re getting killed with costs. Obvious investment costs include the commissions and annual fees you pay to a stockbroker or investment counselor. Harder-to-find costs include the annual expense ratio of mutual funds or exchange-traded funds, or surrender charges on investments such as annuities.
If you’re a mutual fund investor, you can find plenty of no-load funds to buy. Stock investors can enjoy commissions of $4.95 per trade or less by shopping around. Think of expenses as money coming directly out of your investment returns. The more you can contain these, the higher your potential earnings.
Tip No. 5: It’s Accessible
Although you shouldn’t check the value of your portfolio every minute, you should have access to your account values when you want.
In addition to being able to contact your investment counselor via phone or personal visit, build your portfolio around a platform that also offers 24/7 web and mobile access. If you’re in a different time zone overseas, for example, or if you can’t break away from work during business hours to access your account, you’ll need 24/7 electronic access. A strong portfolio lets you be in touch with your money at all times.
Tip No. 6: It’s Liquid
No matter how good an investment is, if you can’t get your money out when you need it, it weakens your overall portfolio.
Whether you’re in a hedge fund that only allows withdrawals once per year or an annuity that charges surrender fees for withdrawing money before the surrender period has expired, there are plenty of investments that restrict the liquidity of your funds. Good investment portfolio management involves finding liquid securities for the simple reason that the future is uncertain, and you never know when you’ll need your money.
Tip No. 7: It Matches Your Risk Tolerance
One of the key components of a strong portfolio is that it lets you sleep at night. Although stocks have higher long-term returns than bonds or cash accounts, they are also more volatile. If you can’t handle the volatility, a 100 percent equity allocation is not appropriate for you.
Typically, you can expect the U.S. stock market to sell off by 10 percent or more about once per year. There are also occasions when it falls much more than that, such as when the S&P 500 Index declined more than 50 percent during the 2008-09 financial crisis. If you can’t handle these types of sell-offs, diversify your portfolio so it includes a higher percentage of lower-risk investments like insured certificates of deposit.
Tip No. 8: It’s Not Overloaded With Your Company Stock
If you work for a good company, it can be tempting to put a large portion of your investable funds into your company’s stock. This is not the mark of a strong portfolio, however.
When you work for a company, you are already, by definition, “investing” in it because you rely on the company for your income, benefits and, often, your retirement plan. Putting most or all of your investable assets into company stock amounts to putting all your eggs in one basket, which both increases your risk profile and results in a non-diversified portfolio.
Learn More: How to Invest in Stocks: A Beginner’s Guide
Tip No. 9: It’s Automated
The best way to make your portfolio grow is to keep adding money to it.
Some financial professionals recommend you save at least 15 percent of your annual income for retirement. The easiest way to make this a habit is to automate the process. Most financial institutions let you sign up for automatic transfers from your bank account to an investment account. In addition to constantly adding to your portfolio, investing on a regular basis lets you take advantage of drops in market prices.
Tip No. 10: It’s in Balance
A strong portfolio is not a “set it and forget it” situation. Over time, all portfolios get out of balance in terms of their original asset allocation. If stocks have a great year and bonds sell off, your original model portfolio of 60 percent stocks and 40 percent bonds might end the year looking more like 75 percent equities and 25 percent bonds.
Rebalance your portfolio as necessary — perhaps once or twice per year — to keep it in line with your investment objectives and risk tolerance.
Up Next: What Makes a Good Investment?
About the Author
After earning a B.A. in English with a Specialization in Business from UCLA, John Csiszar worked in the financial services industry as a registered representative for 18 years. Along the way, Csiszar earned both Certified Financial Planner and Registered Investment Adviser designations, in addition to being licensed as a life agent, while working for both a major Wall Street wirehouse and for his own investment advisory firm. During his time as an advisor, Csiszar managed over $100 million in client assets while providing individualized investment plans for hundreds of clients.