In today’s financial marketplace, a well-maintained portfolio is vital to any investor’s success. As an individual investor, you need to know how to determine an asset allocation that best conforms to your personal investment goals and risk tolerance.
In other words, your portfolio should meet your future capital requirements and give you peace of mind while doing so. Investors can make portfolios aligned with investment strategies by following a systematic approach. Here are some essential steps for building a profitable portfolio.
Determining the Appropriate Asset Allocation for You
Finding out your individual financial situation and goals is the first thing necessary to building a portfolio. Important items to consider are age and how much time you have to grow your investments, as well as the amount of capital to invest and future income needs.
A second factor to consider is your personality and risk tolerance. Are you willing to risk some money for the possibility of greater returns? Everyone would like to earn high returns year after year, but if you can’t sleep at night when your investments take a short-term drop, chances are the high returns from those kinds of assets are not worth the stress.
Achieving the Portfolio
Once you’ve found out the right asset allocation, you need to divide your capital between the appropriate asset classes. On a basic level, this is not difficult as equities are equities and bonds are bonds. But you can further break down the different asset classes into subclasses, which also have different risks and potential returns.
There are several ways you can go about choosing the assets and securities to fulfill your asset allocation strategies such as stock picking, bonds picking, mutual funds, and exchange-traded funds.
Reassessing Portfolio Weightings
Once you have an established portfolio, you need to analyze and rebalance it periodically, because market movements may cause your initial weightings to change. To assess your portfolio’s actual asset allocation, quantitatively categorize the investments and determine their values’ proportion to the whole.
The other factors that are likely to change over time are your current financial situation, future needs, and risk tolerance. If these things change, you may need to adjust your portfolio accordingly. If your risk tolerance has dropped, you may need to cut down the number of equities held.
Once you have figured out which securities you need to cut down and by how much, decide which underweighted securities you will buy with the proceeds from selling the overweighted securities. To choose your securities, use the approaches mentioned in the second step above.
Take a moment to consider the tax implications of readjusting your portfolio when selling assets to rebalance your portfolio. At the same time, always consider the outlook of your securities. If you suspect that those same overweighted growth stocks are ominously ready to fall, you may want to sell in spite of the tax implications.
Overall, a well-diversified portfolio is your best bet for the consistent long-term growth of your investments. It protects your assets from the risks of large declines and structural changes in the economy over time. Monitor the diversification of your portfolio, making adjustments when necessary, and you will greatly increase your chances of long-term financial success.
See Also: Tips For Diversifying Your Portfolio
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