Want To Design the Ultimate Investment Portfolio? Here’s How.
If you’ve decided to take control of your own financial future by starting an investment account – congratulations! You’ve taken the first step toward gaining true financial independence. But before you open your first brokerage account and beginning trading stocks, there are a few things you’ll want to know first.
An investment portfolio is more than just stocks and mutual funds. It should work together to serve a common purpose. You might think all you need to do is spread around you money and invest in a number of different things, but there’s more to it than just that. While diversification is something you’ll likely hear repeated over and over, it means nothing if you don’t understand how diversification is supposed to be applied.
When designing your investment portfolio, you’ll want exposure to a diverse range of asset classes. That includes stocks, bonds, currencies, and commodities. Of course, you may find that investing directly in currencies and commodities presents a bit of a challenge. Many of these types of assets trade on the futures market – something that beginning investors are ill-prepared for. But there’s still a way to invest in them through other means.
Stocks are arguably the easiest asset to invest in. You can choose mutual funds to get exposure or invest directly through a brokerage account. Bond exposure is typically gained through mutual funds, although investors with significant assets can choose to buy bonds directly.
Rather than risking the highly volatile futures market, currencies and commodities can be invested in through ETFs, mutual funds, and stocks. Many of these types of commodity or currency-based investment vehicles come with managed portfolios, giving you a level of instant diversification within the asset class.
Many first-time investors skip over the risk tolerance step when setting up their investment accounts. These investors are usually the same ones that end up telling horror stories of losing it all when the market crashes.
In order to determine what your risk tolerance is, you need to first examine what your financial goals are and what kind of volatility you can bear. If the idea of watching your portfolio value drop 10-20% keeps you lying awake at night, you might want to consider a more conservative portfolio approach, limiting your exposure to blue-chip stocks and bonds.
However, if you’re a young investor, you might want to consider a more aggressive portfolio design. Any losses you might incur, you can recover from with a longer-term investment horizon. By focusing on growth investments like stocks, you can boost your returns and slowly allocate to a more conservative portfolio as you reach retirement age.
Putting It All Together
You portfolio shouldn’t be just about getting the most returns. There are other considerations to keep in mind, such as your personal risk tolerance and investment goals. It’s important to keep your long term objectives in mind when setting up your portfolio. Remember to stay diversified and keep a good mix of investments in your portfolio.
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