Creating an Investment Portfolio

Stocks? Bonds? Mutual Funds? Derivatives? Real estate? What specific investments are right for you?

An endless and ever-growing list of investment options are available – ranging from the more familiar, such as stocks, bonds and mutual funds, to the more aggressive, like derivative securities and hedge funds. A financial planner can help you select the best choices based on your personal income goals and requirements, whether they are interest income, capital growth, dividend income or rental income.

Five steps to assure solid investment portfolio management  

1. Analyze the situation. Your current financial situation, your tolerance for risk and your expectations on return are all important factors in making investment decisions.

Your goal is to get the highest return on investment that you can within your comfort level. Your tolerance for risk likely depends on several factors, including your expectations, timelines for using this money, life stage, personality, knowledge and investment experience. You'll want to choose a mix of investments that has the potential to provide the return you want at the level of risk you feel comfortable with.

2. Determine allocation. Asset allocation helps you diversify your portfolio to attain your goals without overstepping your tolerance for financial risk.

It is an almost universally accepted concept that any portfolio should include a mix of investments. These investments could include a mix of stocks, bonds, mutual funds and other investment vehicles. A portfolio should also be balanced. That is, the portfolio should contain investments with varying levels of risk to help minimize exposure if one of the portfolio holdings decline significantly. The underlying principle is that different classes of investments have shown different rates of return and levels of price volatility historically. Also, because different asset classes respond differently to the same news, your stocks may go down while your bonds go up or vice versa.

Many investors make the mistake of putting all their eggs in one basket. Diversifying your investments over different asset classes will help you minimize volatility while maximizing potential return.

3. Develop a written investment strategy. A tailored plan will provide a disciplined and systematic approach to investing. Long-term strategies will help protect against short-term market swings and provide hedging strategies to manage risk.

Your investment strategy should be based upon your specific circumstances and characteristics:

• Age
• Investment risk tolerance
• Capital currently available to invest
• Current income
• Future need for investment capital and income
• Amount that is required to be saved on an ongoing basis
• Consumption preferences – i.e. the importance of trading off current consumption for the ability to consume in the future

The investment policy must also take into account inflation, economic growth and the investment time horizon.

4. Implement plan. Be sure you are focused on your total portfolio and your strategy rather than on individual investments.

5. Measure and adjust. Regular communications with your financial advisors assure they get your feedback and make adjustments based on changes in your situation.