All your investments – money market account, stocks, bonds – comprise your investment portfolio. The contents of your portfolio will vary depending on your reasons for investing. You need to consider all your reasons as you select particular investments for your portfolio.
Diversifying your investments is the best way to protect your funds. Diversification – or asset allocation – helps balance the cycles inherent to our economic system because you select various kinds of investments for your portfolio and decide what percentage of funds to place in each investment.
Choosing both income and growth holdings in a variety of investment vehicles is a good start at diversification. Typically, we look to debt investments, such as bonds, for income. We look to investments with the ability to appreciate in value, like stocks, for growth.
You can further diversify your investments into different economic sectors. Stock investments, for example, might be spread among companies from many sectors, such as energy, financial, basic materials, consumer goods, utilities, and technology. A good knowledge of economic projections (which sectors are supposed to be stronger in the coming years) can be helpful here.
Once you’ve selected assets to purchase, you must decide how to allocate your funds among them, so examine your investment goals carefully.
How long until you may need the funds? Time plays a significant role in asset allocation. Growth investments, such as stocks, tend to perform better over the long haul. The more time you can allow your money to grow, the higher percentage of your funds should be placed in growth investments.
Are part of your investment funds placed in a tax-exempt or tax-deferred account such as a pension plan or IRA? If not, you may want to include certain tax-advantaged investments such as municipal bonds.
How much money do you need to accumulate? How much risk can you bear? There’s a direct relationship between risk and return. Your potential to earn higher returns on your investment increases if you’re willing to assume greater risk.
Understanding and carefully monitoring risk can help you maximize your investment income. Risk is also related to factors such as age and time. You can usually afford to assume more risk when you are younger. If retirement is only a few years off, you’ll want a higher percentage of conservative investments in your portfolio.
Investment goals can change quite dramatically over time. That’s why it’s important to review your holdings regularly and make adjustments when necessary. Remember, there are no hard and fast rules. How you build your investment portfolio depends on where you are in life and what you want to accomplish.