A well-maintained portfolio is a necessary tool to achieve your investment goals. You need to know how to build a profitable portfolio that best meets your expectations and investment targets. In this article, we’ll talk about the important steps you should take when building your very own portfolio.
Find the Best Asset Allocation
The first step is determining your individual financial situation and goals. Among the most important items you need to think about are your age and how much time you need to let your investments grow.
You also need to consider the amount of capital you have as well as your future financial needs.
More important, take a closer look at your investing personality and risk tolerance. Ask yourself if you can take the pressure of risking your hard-earned money in exchange of a bigger return.
In general, there are only aggressive and conservative investors. Aggressive investors are those that can bear higher levels of risks. They allocate a bigger portion of their portfolio to equities and smaller portions on bonds. Conservative ones are those that are less willing to take on risks.
Creating the Portfolio
After determining the proper asset allocation, the next step is to divide the capital between the correct asset classes.
In general, you only have to choose between equities and bonds. Still, you can add more other types and subtypes that have different risk and return potentials. Here are the most common asset types that investors pick:
- Stocks – choose stocks that meet your risk tolerance. Consider the sector, market cap, and stock type when picking.
- Bonds – consider many factors such as coupon, maturity, bond type, and credit rating.
- Mutual funds – these let you get instantly diversified and benefit from the expertise of professional fund managers
- Exchange Traded Funds – ETFs are alternatives to mutual funds. These are simply mutual funds that are traded in a similar manner to stocks.
Portfolio Weightings
After establishing your portfolio, the next step is to analyze and rebalance it in a regular manner. That’s because the changes in price movements may cause your portfolio to deviate from the original weightings.
At the same time, keep in mind that your financial needs, future needs, and risk tolerance may also change. If they do, you must also adjust your portfolio accordingly.
Determine which of your positions are currently over- or underweighted, and then determine how much you need to reduce and allocate to other classes.
Strategic Rebalancing
And lastly, after determining which securities you need to rebalance, it’s time to decide which underweighted securities are best to buy and which overweighed securities are best to sell.
Still, keep in mind the outlook of these securities. Sometimes those that are overweighed stocks are going to fall hard in the near future. You will incur tax implications when you sell them, but that’s better than losing all your profits when the price plummets.
Throughout the process of building your portfolio, it’s important to maintain your diversification as your priority.
