When it comes to finance, a portfolio refers to your collection of investments. Whether your investments are held by a company, hedge fund, financial institution, or an individual, it’s important to diversify your investment portfolio.
Diversifying your portfolio means creating a combination of asset classes such as stocks, bonds, and cash. Financial strategists
emphasize diversification to prevent putting ‘all of your eggs into one basket’. Having a diverse portfolio offsets the biggest market risks and increases your greatest likelihood in
seeing a return on your money. Whether you’re saving for that dream vacation or putting money toward your ideal home, this how-to guide has valuable information for both seasoned investors and new financiers alike.
Step 1: CREATE YOUR PORTFOLIO
Before you can decide where you want to invest your money, you’ll need to first establish an investment portfolio. You might decide to segment certain portions of your holdings as separate portfolios.
For example, your account for college savings might be one portfolio and the money earmarked for retirement might be managed as another. If you do not have an employee-sponsored 401k, you’ll need to open your own investment account. For your first time, you’ll probably want to choose between a Traditional IRA or Roth IRA. Find an investment firm or bank that offers IRAs such as Vanguard, Fidelity, or Wells Fargo and connect your checking or savings to the account to start buying index funds. When it comes
time for tax season, be sure to hire an accountant. They have access to professional web-based tax software systems that can eliminate inaccuracy and speed up the filing process—with no sweat off your brow.
Step 2: RESEARCH
Combining different investments in various allocations will have an impact on both the growth of your portfolio and the downside risk overtime. Choosing the right allocations, however, can be pretty tricky.
Regardless of whatever goal you’re saving towards, there are two factors you must focus on when researching various investment vehicles: the first is how much time you expect to have before needing the money—otherwise known as the time horizon; the second is your attitude toward risk, otherwise known as risk tolerance.
For example, if you’re saving for a 25-year goal, such as retirement, you might be willing to take an occasional risk in the name of long term growth. With such a long time horizon,
you’ll likely have enough time to recover lost ground in the event of a temporary market downturn. In that case, researching domestic or international stocks might be appropriate.
If you’re investing towards a 10-year goal, your strategy will probably be different.
Owning stocks is nothing more than owning a piece of a business. To find out about the health and livelihood of various businesses, read through their public reports. Annual reports are required for businesses who issue stocks, and learning to read through them
will be essential to a valuing a company and their worth.
Familiarize yourself with accounting goodwill, depreciation, and outstanding diluted shares to become an investment pro. Additionally, learn about value investing and how to read market trends for a balanced, diverse portfolio.
Step 3: DIVERSIFICATION
The goal of diversification is not to maximize returns. Rather, your goal here is to limit the impact of market volatility. By slightly altering the asset allocation, you can tighten the
range of swings between asset performances year by year. Adding more fixed income investments to a portfolio will slightly reduce one’s expectations for long-term returns, but may significantly reduce the impact of market volatility. To balance risk and reward, include these four primary components for a diversified portfolio.
Stocks are the most aggressive portion of the portfolio and provide the greatest opportunity for long-term growth. However, the increased probability of growth correlates to an increased risk, especially in the short term.
Bonds are generally considered less volatile than stocks because they provide regular interest income. They behave differently than stocks, and can act as a cushion against the fluctuating market, but they generally provide lower returns.
SHORT TERM INVESTMENTS
A short-term investment might include a money market fund. Money market funds are conservative investments that are stable and provide easy access to money. They’re great for those looking to preserve capital, but in exchange for that security, they usually provide lower returns than bonds.
These investments issued by non-U.S. companies provide exposure to opportunities not offered by U.S. securities. They’re great options for those seeking higher potential returns at the cost of higher risk.
Some other components of a diversified portfolio include sector, real estate, allocation and commodity focused funds. Diversify your portfolio for the most successful investing, but
remember that it doesn’t ensure profit or guarantee against loss.