Your portfolio of investments must be fine-tuned to you and your needs. It should contain investment vehicles you are comfortable with and interested in, spread across different markets that balance the level of risk you are willing to take with the security you need. You should also consider how hands-on you want to be. Do you want to just set it and forget it or do you want to actively manage your investments? Even savvy investors seek the advice of an adviser they trust, and having expert tax advice is critical. Make certain your adviser understands all your needs.
To strike the right balance in your investment portfolio you should first identify your investment objective. Are you saving just for retirement or will you need a significant portion of your portfolio to pay for your children’s college education? How far off are the events for which you’ll need these funds? Do you want to draw an income from your investments or do you want to grow a nest egg? Estimate the amount you will need and when you will need it. Then examine your budget to determine how much you are able to set aside each month to invest. This could involve making some tough decisions about adapting your current lifestyle to afford the monthly contributions to your investment plan -- and your future.
The greater the risk, the greater the possibility there is for a greater reward – and the greater the possibility there is for a greater loss. There are two factors to consider when determining your tolerance for risk. One is how much time you have to build your portfolio. Generally, the more time you have, the higher risk you can afford to take. Even given this consideration, some people are just not comfortable with the possibility of taking significant losses, regardless of the potential gain or the amount of time they may have to recoup a loss.
Liquidity refers to how easily an asset can be sold or converted to cash. A balance should be struck between your liquid and non-liquid assets to protect yourself against an emergency requiring you to have immediate access to a significant amount of cash, such as an accident or major illness. According to David Himmelstein, an associate professor of medicine at Harvard, most Americans are "one serious illness away from brankruptcy."
Diversification involves investing in different types of assets in different markets so that if one market slumps, it won’t drag down your entire portfolio. Major categories include stocks, bonds, real estate and cash equivalents. Diversification also occurs within categories. For instance, you can purchase stock in individual companies or you can buy a mutual fund that pools the money from many investors and buys many different stocks, spreading the risk over multiple companies in different geographic markets and business sectors. The portion of your portfolio you decide to have in stocks could include one or both of these.
Change in Circumstance
Remember to rebalance your portfolio whenever you experience a significant change in circumstance, such as getting married, having a baby or experiencing a change in income. As you get older, your objectives are likely to change -- and possibly even your tolerance for risk.
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