Investment portfolio: what is it and how to build a good one


Like any industry, investing has its own language. And a term that people often use is “investment portfolio,” which refers to all of your invested assets.

Building an investment portfolio can seem daunting, but there are steps you can take to make the process painless. No matter how much you want to invest in your investment portfolio, there is an option for you.

Definition of the investment portfolio

An investment portfolio is a collection of assets and can include investments like stocks, bonds, mutual funds, and exchange traded funds. An investment portfolio is more of a concept than a physical space, especially in the age of digital investing, but it can be helpful to think of all of your assets under one metaphorical roof.

For example, if you have a 401 (k) account, individual retirement account, and taxable brokerage account, you should look at those accounts collectively to decide how to invest them.

If you want to completely free yourself from your portfolio, you can outsource the task to a robo-advisor or financial advisor who will manage your assets for you. (Learn more about working with a Financial Advisor.)

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Investment portfolios and risk tolerance

One of the most important things to consider when building a portfolio is your personal risk tolerance. Your risk tolerance is your ability to accept investment losses in exchange for the opportunity to earn higher investment returns.

Your risk tolerance is related not only to how much time you have before your financial goal, such as retirement, but also how you mentally manage the rise and fall of the market. If your goal is many years away, you have more time to get through those ups and downs, which will allow you to profit from the general upward movement in the market. Use our calculator below to help you determine your tolerance for risk before you start building your investment portfolio.

How to build an investment portfolio

1. Decide on the help you want

While building an investment portfolio from scratch seems like a chore, you can still invest and manage your money without going the DIY route. Robo-advisers are an inexpensive alternative. They take your risk tolerance and general goals into account and build and manage an investment portfolio for you.

If you want more than just investment management, an online financial planning service or financial advisor can help you build your portfolio and put together a comprehensive plan. financial plan.

2. Choose an account that matches your goals

To build an investment portfolio, you will need an investment account.

There are several different types of investment accounts. Some, like IRAs, are for retirement and offer tax benefits for the money you invest. Regular taxable brokerage accounts are better for purposes other than retirement, like a down payment on a house. If you need the money that you plan to invest over the next five years, it may be better suited for a high yield savings account. Think about exactly why you are investing before choosing an account. You can open an IRA or brokerage account with an online broker – you can see some of our best choices for IRAs.

3. Choose your investments based on your risk tolerance

After opening an investment account, you will need to complete your wallet with the real assets in which you want to invest. Here are some common types of investments.

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Shares are a tiny part of the ownership of a business. Investors buy stocks that they believe will increase in value over time. The risk, of course, is that the stock won’t increase at all, or even lose value. To help mitigate this risk, many investors invest in stocks through funds, such as index funds, mutual funds, or ETFs, which hold a collection of stocks from a wide variety of companies. . If you go for individual stocks, it is generally wise to only allocate 5-10% of your portfolio to them. Find out more how to buy stocks.

Obligations

Bonds are loans to businesses or governments that are repaid over time with interest. Bonds are considered safer investments than stocks, but they generally have lower yields. Because you know how much interest you will receive when you invest in bonds, they are called fixed income investments. This fixed rate of return for bonds can balance riskier investments, such as stocks, within an investor’s portfolio. To learn how to invest in bonds.

Mutual fund

There are different types of mutual funds you can invest in, but their general advantage over buying individual stocks is that they allow you to add instant diversification to your portfolio. Mutual funds allow you to invest in a basket of securities, made up of investments such as stocks or bonds, all at once. Mutual funds carry a certain degree of risk, but they are generally less risky than individual stocks. Some mutual funds are actively managed, but these tend to have higher fees and often do not offer better returns than passively managed funds, commonly known as index funds.

Index funds and AND F try to match the performance of a certain market index, such as the S&P 500. Because they do not require a fund manager to actively choose the fund’s investments, these vehicles tend to have lower fees to those of actively managed funds. The main difference between ETFs and index funds is that ETFs can be actively traded on a stock exchange throughout the trading day like individual stocks, while index funds can only be bought and sold at a set price. at the end of the trading day.

If you want your investments to also make a difference outside of your investment portfolio, you may want to consider impact investing. Impact investing is an investment style where you choose investments based on your values. For example, some environmental funds only include low carbon companies. Others include companies with more women in management positions.

While you can think of other things as investments (your house, cars, or artwork, for example), these are generally not considered part of an investment portfolio.

4. Determine the best asset allocation for you

So you know you want to invest primarily in funds, bonds, and a few individual stocks, but how do you decide exactly how much of each asset class you need? How you allocate your portfolio among different types of assets is called your asset allocation, and it depends heavily on your tolerance for risk.

You may have heard recommendations on how much money to allocate to stocks versus bonds. Commonly cited rules of thumb suggest subtracting your age from 100 or 110 to determine how much of your portfolio should be devoted to investing in stocks. For example, if you are 30, these rules suggest that 70-80% of your portfolio is allocated to stocks, leaving 20-30% of your portfolio for bond investments. In your sixties, this mixture increases to 50% to 60% allocated to equities and 40% to 50% allocated to bonds.

When creating a portfolio from scratch, it can be helpful to look at model portfolios to give you a framework on how you might want to allocate your own assets. Take a look at the examples below to get an idea of ​​how aggressive, moderate, and conservative portfolios can be constructed.

A model portfolio does not necessarily make it the right portfolio for you. Take your risk tolerance into account when deciding how you want to allocate your assets.

5. Rebalance your investment portfolio as needed

Over time, your chosen asset allocation can get derailed. If any of your stocks go up in value, it can upset your portfolio proportions. Rebalancing is how you restore your investment portfolio to its original composition. (If you’re using a robo-advisor, you probably won’t have to worry about this, as the advisor will likely automatically rebalance your portfolio as needed.) Some investments can even rebalance, like target date funds, a type of the fund. mutual fund that rebalances automatically over time.

Some advisers recommend rebalancing at set intervals, such as every six or 12 months, or when the allocation of one of your asset classes (like stocks) changes by more than a predetermined percentage, like 5%. For example, if you had an investment portfolio with 60% stocks and it grew to 65%, you might want to sell some of your stocks or invest in other asset classes up to that your equity allocation comes back to 60%.


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