Building an investment portfolio is not difficult but building one that outperforms the broader market requires some knowledge about how to do so and solid investment strategies. When doing it, you want a mix of investment options that all work together to give you the returns you are looking for, whether in the short or long term.
Let’s look at some tips that will help you do so.
Before you start building your portfolio, you need to understand the type of investor you are and what your investment goals are. Start by thinking about the level of risk you can tolerate and the outlook for the investments.
If you are comfortable with a lot of risk, options like leveraged EFTs and high-yield bonds can be an option. Bonds and similar investments can be great for those who want long-term growth and profits while taking on little risk.
How comfortable you are with fluctuations in your investments’ value will also determine your risk tolerance. A well-constructed portfolio can help you weather out the fluctuations and volatility inherent in all investments.
Create a Good Investment Mix
This is also known as diversifying your portfolio. An investment mix includes different types of investment options. Some of these options include exchange-traded funds, mutual funds, stocks, bonds, real estate, cash, and other types of investments.
Your diversified investment mix should include high and low-yield investment options. The former will carry higher risks and the opposite is true for the latter. Low-yield and low-risk investments help reduce the overall volatility of your portfolio.
Investment options like precious metals and commodities typically have very high returns, but their wildly-swinging value due to their volatility makes them unsuitable for some types of investors.
Choose Some Income-generating Investments
While some investors want to make money after their investments mature or after a certain period, some want some income before that happens. For these investors, options like dividend stocks and bonds are excellent options.
Both of these pay out a regular amount for a given period such as a quarter or year. Another great thing about these investment options is that they allow you to take advantage of the power of compounding.
Instead of taking out the dividend or amount paid by a bond, you can choose to reinvest that amount into more shares or bonds. You can use a calculator to understand how the power of reinvestment will lead to a bigger return should you decide to do this.
Rebalance as Needed
It is not enough to build an investment portfolio and leave it as is. You should nurture your investment portfolio to help it grow as much as you need it to. This is done through rebalancing.
Your investment portfolio will drift as time goes by. For example, the increase in the value of a stock or mutual fund can lead to an imbalance in your portfolio. To rebalance your portfolio, you check the value of the different asset classes and types you have in your portfolio.
You then decide what to sell or buy more of. By doing so, you ensure no asset type or class has a significantly higher value than another. Financial advisors recommend rebalancing your portfolio every six or twelve months.
As the value of the different assets in your portfolio increases and you keep rebalancing it, you will find the value of the overall portfolio increases without the proportions or percentages of the different classes changing too much.
When rebalancing, you can also purchase new asset classes or investment options with the cash gained from reducing the proportion of given asset classes.
Building an investment portfolio requires great care as you want your investments to help you meet your investment goals and help you build wealth in the long term. Understanding the type of investor you are, what assets work best for you, and how to diversify your portfolio will help with this.