Step by Step Guide to Building an Investment Portfolio

Introduction

An investment portfolio is a collection of investments that is created with the purpose of achieving a specific financial goal. It consists of a range of investments varying from stocks and bonds to mutual funds, ETFs, and other investments. Building a well-diversified investment portfolio can bring a number of benefits, such as helping you reach your long-term financial goals and alleviate the short-term market volatility.

If you’re a novice investor, it's important to understand the step-by-step process of building an effective portfolio. This guide provides a number of actionable tips to make creating your portfolio easier. Let’s dive in!

Understand Your Goals

Regardless of the type of investor you are, understanding your goals will have a major impact on how you should approach building an investment portfolio. Before you can begin the process of selecting an asset allocation, you will need to identify what your investment goals are first. Goals may include investment objectives, risk tolerance (the amount of volatility you are willing to tolerate) and the length of time for which you plan to keep your investments.

Define Long-Term versus Short-Term Goals

Before investing, you should evaluate whether you are looking for short-term returns or long-term growth. Defining your goals between short-term and long-term can help you define an appropriate asset allocation to meet your desired outcome. Short-term goals may be associated with immediate needs or those that are fulfilled within a few years, while long-term goals may relate to retirement or a college fund that won't need to be used for many years.

Estimate Financial Resources

Investing requires some amount of money to start. Estimating the amount of financial resources you have available to deploy in to investments is a important step in the process of portfolio building. You need to first determine what amount of resources you have available to deploy and how frequently you can make investment resources available. This will help you determine how much you should allocate to different asset classes.

Identify Levels of Risk and Return

Investors should be aware that any type of investment comes with some risk associated with it. Knowing your risk tolerance and desired return is a key factor when selecting the right investments. Generally, investments have different levels of risk and return associated with them. For example, stocks and mutual funds typically offer higher potential returns but also involve higher levels of risk, while bonds and money market instruments involve the least amount of risk but also offer the least amount of returns.

• Define long-term versus short-term goals
• Estimate financial resources
• Identify levels of risk and return

3. Get Advice

Before committing to an investment portfolio, it is important to consult the advice of a financial advisor. They will be able to provide insight into the best and most appropriate investments, as well as how to construct an appropriate portfolio. A financial advisor will be able to help investors of all experience levels understand the risks and rewards of different investment options, and provide guidance on the best investments to complement an individual’s investment goals.

A. Consult with a financial advisor

Finding the right financial advisor is essential to ensure that the advice that is received is from a reputable and knowledgeable source. There are a variety of sites, such as FINRA’s BrokerCheck and the Investment Adviser Public Disclosure, which allow investors to check that the financial advisor is licensed, and search to make sure there have been no complaints or disciplinary actions taken against the advisor.

B. Engage in research and education

Investors should also engage in their own research and education during the building of their investment portfolio. There are a number of books, articles, and websites that can provide valuable information and guidance on investment topics. Resources such as webinars and investing classes can also be useful. Additionally, engaging in conversations with experienced investors can provide invaluable information to better understand the investments and help determine the best investment strategies.

• Websites: Investopedia, The Balance, FINRA’s BrokerCheck
• Webinars: Investment trainings by firms
• Investing classes: Online education platforms
• Experienced investors: Networking event or online forums

Analyze and Determine Asset Allocation

When building an investment portfolio it is important to analyze and determine asset allocation. Asset allocation is the division of an investor’s capital between different asset classes, such as; stocks, bonds, real estate, and money market investments. By diversifying assets, the investor can create a portfolio that maximizes their return while minimizing their risk.

Decide What Asset Classes to Add

The asset classes chosen for a portfolio depend on the investor’s goals, age, risk tolerance, time horizon and other factors. Before investing, an investor should research each asset class and decide which ones are appropriate for their portfolio. A general rule of thumb is to choose an asset allocation based on the investor’s age, with more aggressive investments for younger investors and more conservative investments for those close to retirement age.

Allocate Funds Consistently

Once an investor has selected their asset classes, they should allocate their funds consistently to each one. For example, an investor may decide to invest 50% of their funds in stocks, 30% in bonds, and 20% in money market investments. To make sure they remain diversified and balanced, investors should rebalance their portfolios on a regular basis. This means periodically buying or selling securities to return to their desired asset allocation.

• Research each asset class and decide which ones are appropriate for your portfolio
• Base asset allocation on your age, goals, risk tolerance, and time horizon
• Allocate your funds consistently to each asset class
• Periodically rebalance your portfolio to return to the desired asset allocation

Choose Investments

Developing and building an investment portfolio requires significant time, research and dedication. Before starting, one should be familiar with their investment goals and risk tolerance. Upon committing and planning out the steps, it is important to evaluate and research potential investments, as well as focus on maintaining and strengthening one's diversified portfolio. The following outlines the steps for choosing the investment for a portfolio.

Select Funds Based On Goals And Risk Tolerance

When selecting funds for one's portfolio, it is important to ensure that the investments selected are in-line with one's financial goals and risk tolerance. Investments and funds should have a clear strategy and benchmark, as well as have sound and detailed investment details outlined. Understanding one's investment timeframe and capacity, should also be taken into account when selecting funds.

Research And Evaluate Investments

When considering different investments, it is important to evaluate the investment's history and performance. This can be done by reading different forms of published material, such as journals and articles. It is also important to inquire about the financial advisors and management of the funds, as well as the fees and expenses associated with the investments. Additionally, traders should evaluate the investment’s overall strategy, and how it aligns with the goals of the portfolio.

Develop A Diversified Portfolio

It is important for traders to diversify their portfolios across different assets and investment products. This way, investors can spread out their risk and maximize potential rewards. A portfolio should include both simple equity funds and bonds, as they are important components of asset allocation. Further, long and short-term investments should be taken into account, as well as global investments, to give traders wider investment options.

• Ensure investments are aligned with goals and risk tolerance
• Research and evaluate investments
• Develop a diversified portfolio
• Include both simple equity funds and bonds
• Consider both long and short-term investments
• Consider global investments for wider portfolio options

Monitor and Rebalance Portfolio

Monitoring and rebalancing a portfolio is key to achieving your investment goals. Keeping up with changes in the stock market and other investments can help ensure that your portfolio is properly aligned with your objectives.

Set up a Portfolio Tracking System

To begin monitoring and rebalancing your portfolio, the first step is to establish a tracking system. You may choose to use a software program or manual tracking method, depending on your desired level of detail. The system must include all of your investments, the current performance of each, and the percentage of your entire portfolio allocated to each type of asset.

Monitor Portfolio Performance

With your tracking system in place, you should regularly follow the performance of each asset within your portfolio. Keeping up with the changing market can provide important insight into when your portfolio needs to be rebalanced. Pay special attention to any investments that have not been performing as expected.

Rebalance Portfolio as Needed

When a portfolio needs to be rebalanced, changes must be made to bring the portfolio back into line with the goals that were set at the beginning. Specifically, this could involve selling excess investment shares, reducing the number of investments, making additional investments, or changing the combination of different asset types. A good way to determine the frequency with which a portfolio needs to be rebalanced is to set a tolerance threshold, so that you will know when it's time to make adjustments.

• Set up portfolio tracking system
• Monitor portfolio performance
• Rebalance portfolio as needed

Conclusion

Building an investment portfolio is a complex endeavor that requires thoughtful planning, especially when you consider the risks, rewards, and options available. Although all individual investors have different goals, a sound investment portfolio is rooted in an understanding of financial goals, an examination of personal knowledge, a thorough analysis of the risks and rewards associated with various asset classes, and close monitoring of performance.

To best build an investment portfolio, there are a few important steps to consider:

• Define financial goals: The first step is to determine what the investment portfolio should achieve, be it growth, income, or some combination of the two.
• Examine knowledge: After establishing the desired outcome of the portfolio, the investor will want to assess their own understanding of investment products, taxation, and fully understand the risks and rewards of the assets being considered.
• Choose asset classes: Assets should be chosen to match the investor's goals, risk profile, and knowledge. Depending on the investor's risk profile and financial goals, a variety of investments may be appropriate, such as stock, bonds, mutual funds, Exchange Traded Funds, and real estate.
• Design the portfolio: Once the various asset classes have been chosen, the investor can then select asset categories and specific investments within them to create the desired diversification.
• Monitor performance: With an established portfolio in place, the investor should then continuously monitor the portfolio so that any necessary adjustments can be made to remain in alignment with the goals.

By following these steps and creating a well-diversified portfolio, investors can best achieve their desired financial goals. When building an investment portfolio, it is imperative that the investor understands their investment goals, continually builds their knowledge base, and closely monitors their performance.