Developing an investment portfolio takes more than luck or having the knack for picking hot stocks at the right time. Instead, it takes careful planning and a clear understanding of the goals you want your portfolio to achieve. Adhering to a few basic concepts can increase your chances of creating a portfolio that will provide a strong long-term return on your investment dollars.
Understand Your Risk Tolerance
Your tolerance for risk plays a key role in the types of investments you choose. For example, if you consider yourself a bit of a gambler and don't fear the possibility of a declining portfolio, you may be able to maximize your returns by investing in more speculative stocks or mutual funds. However, if a dip in stock prices is likely to keep you up at night, you're probably better off putting you money into less risky investments, such as bonds or Treasury bills.
Allocate Your Assets
How effectively you allocate your assets among the stocks, bonds and other investment instruments within your portfolio will drive about 94 percent of its total return, says Kevin Brosious, certified public accountant, Certified Financial Planner and president of Wealth Management, Inc., in Allentown, Pennsylvania, When you are in your 20s and 30s, you may want to create a more aggressive portfolio to increase your chances of a greater return on your investment dollars over time. Your youth gives you time to recover from the inevitable losses along the way. As you get closer to retirement, your asset allocation should become more conservative, as your objective is to preserve the capital you've accumulated through the years.
Just like your car, developing an effective portfolio requires routine maintenance to keep things operating smoothly. Reviewing your portfolio on a regular basis will ensure proper diversification and balance of your portfolio to keep you on track for your investment goals. For instance, if you invest in your 401(k) plan at work, review it at least once a year to determine if your assets are properly allocated among the various investment options.
Unless you have extensive investment expertise, a wise move is to seek guidance from a competent financial adviser. An adviser can help you avoid pitfalls that can derail your investment program and ensure that your choice of investments meets your level of risk tolerance and is in tune with your long-term financial goals. According to the Securities and Exchange Commission, you should ask questions of prospective advisers concerning their background, training and licensing. Choose an adviser that is registered with the SEC or the Financial Industry Regulatory Authority.