BUILDing an investment portfolio may seem daunting to some, but taking a systematic approach can simplify the process. Investing is dynamic and each investment portfolio must be adapted to its unique situation. In this article, we walk through the steps to help you structure a portfolio that best suits your needs.
Step 1: Determine the purpose of your portfolio
The first step is to define your overall goal. You need to have a clear idea of why you are investing and what to expect from your portfolio. Common objectives include capital appreciation, income generation, capital protection or a combination of these. Whether you want to earn an income or build up savings for rainy days, setting your portfolio goal is essential as it lays the foundation that dictates the strategic direction of your investments. It is also important to develop a cash flow plan, in which you detail the incoming and outgoing cash flows. You will then be able to better understand your financial situation and allocate funds appropriately to achieve your goal.
Step 2: What is your investment horizon?
This is the length of time your portfolio is expected to meet its goals. Are you investing for the short, medium or long term? Maybe your portfolio has multiple horizons with different goals associated with each. This has a direct impact on the level of risk you should be prepared to take. A short-term goal warrants a low-risk, measured and disciplined approach. A long-term goal allows for more flexibility and can withstand higher volatility since its wider time frame adapts to changes in business cycles that allow for recoveries in the value of the investment.
Step 3: Assess Your Risk Tolerance
Risk in this context refers to the likelihood of fluctuations in the value of your portfolio due to changes in financial markets. Market returns and economic conditions change frequently, which can lead to periods of superb returns followed by periods of slowing performance. Investments are sensitive to fluctuations in volatility and may move irrationally due to the merging of various investor behaviors. The goal is to determine your willingness to accept the risk and try to categorize your portfolio accordingly. Common risk categories are conservative, moderately aggressive, and aggressive. Would you be uncomfortable if market prices suddenly fell and investment returns eroded? If so, you would be called a conservative. On the other hand, an aggressive investor is comfortable with volatility and may choose to weather market turbulence.
Step 4: Run!
Now on to the exciting part! Here we are looking for investments that meet the criteria highlighted above. The main types of assets are stocks, bonds, mutual funds and exchange traded funds. Stocks are viewed as higher risk instruments, pay discretionary dividends and have the potential for price appreciation. Bonds offer the advantage of stable and predictable interest payments. Mutual funds and exchange traded funds allow you to gain exposure to a basket of investments that encompasses a variety of asset types and investing styles.
Diversification is a key element that protects your portfolio from unnecessary volatility. You shouldn’t put all of your eggs in one basket, nor should you put all of your funds in one instrument. Investment vehicles such as mutual funds group together different asset classes and allow you to achieve diversification. Your goal, your risk tolerance and your time horizon go hand in hand here in building your portfolio. If your goal is to generate income while preserving your initial investment, your portfolio should have a higher weighting in bonds. The First Citizens Abercrombie TT $ Fixed Income Fund and the Paria US $ Monthly Fixed Income Fund both offer diversified exposure to bonds. Another First Citizens mutual fund that may be suitable for a moderately aggressive investor is the El Tucuche Fund. If you are aggressive with a long time horizon, then the portfolio can support higher allocations to equities. The First Citizens Immortelle Income and Growth Fund is one such fund that allows you to gain exposure to both fixed income and equities while seeking to fulfill a dual mandate of capital appreciation and generation. of income, through a single investment.
Step 5: Monitor and Adjust
Once the portfolio is established, the monitoring process begins to ensure that it is on track to meet the needs of the portfolio. Over time, investments can generate variable returns, which can cause the portfolio to deviate from its target composition. At this point, a rebalancing is advised. Rebalancing involves buying and selling investments within the portfolio in order to stay aligned with your preferences and constraints. It is important to stay well informed with market updates and company news to be able to appreciate the different drivers of your portfolio returns. Please feel free to contact our internal experts at First Citizens Investment Services who can guide you through this process.
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