How to Build an Investment Portfolio

Let's look at how to build an investment portfolio. No single investment strategy or approach is right for everyone. Investors have different reasons for investing and different goals. It's important to understand what you want and to put together a strategy to get there.

What Is Your Investment Goal?

What are your investment goals? How much safety of principal do you want while you invest? Are you investing for your children's college education? Or are you investing to prepare for a comfortable retirement? Investing can serve many purposes. What matters is understanding why you're investing before you put your money in. It's best to have clear investment goals, and you need to decide how much risk you'll take on and how much time you'll invest.

Taking On Risk

Risk can mean many things, but in investing it means the risk of losing money. In other words, you could lose your entire principal. Every investment carries some kind of risk. The stock market can crash very hard, as it did during the 2008 financial crisis.

How far can the value of your investments fall before you can no longer tolerate it? This ties back to your goals. If you're in your 20s or 30s and investing for retirement, you shouldn't obsess too much over swings in value. But if you're 60 and don't have time to make up for losses in your investments, the amount of risk you can take on will be lower.

If a parent is investing for a newborn child's college education, there's still plenty of time, which allows them to take on a bit more risk. To sum up, how much risk you take on in investing should be weighed against the time frame in which you'll need the money.

Trading Frequency

How long will you stay invested in a particular investment? The legendary investor Warren Buffett rarely sold the stocks he owned and wasn't shaken by market swings. This is commonly known as a "buy-and-hold strategy." The opposite extreme is buying and selling stocks every day. But this isn't a very good approach for ordinary investors who aren't professionals. That said, simply waiting no matter what isn't always the answer either. You should review your investments regularly as circumstances change and make sound decisions accordingly.

Understanding Types of Investment Products

Some investment products require sophisticated knowledge and monitoring, while others can be left alone. An easy path is to choose a range of low-cost index funds that cover the broad market, such as bonds, domestic stocks, and foreign stocks. You can also consider mutual funds, where a fund manager manages the portfolio. These funds are designed to gradually reduce their share of stocks as the fund's target date approaches. Investors with extensive knowledge and experience may consider actively managing individual stocks, real estate, or other alternative investments.

Building an Investment Portfolio

An investment portfolio is a way of looking at all the products you invest in together. Ideally, an investment portfolio is meant to balance risk and return appropriately so that investors can reach their goals without relying too heavily on any single product.

An investment portfolio includes assets such as stocks, bonds, and cash. You can create an overall portfolio covering all your investments, or you can create separate portfolios for specific parts of your holdings. For example, you might have one portfolio for college tuition and another for retirement.

A portfolio should be designed to fit the purpose of your investing. Just as you would before setting off on a road trip, investors should have a plan and a destination in mind before investing their money. As a basic rule, it's wise to spread your investments appropriately. This helps not only with potential returns but also with spreading out risk.

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