Build your savings with an investment portfolio customized to your financial needs. Here’s everything you need to know.
- Knowledgeable investors build their portfolios by combining different investments to work toward achieving their investment goals and reduce their investment risk. The amount of capital that one allocates to an investment is determined by the risk and reward characteristics of that investment. Combining investments with different risk-reward characteristics tends to balance the overall risk of the portfolio.
This process is called asset allocation. You should consider factors such as your risk tolerance, risk aversion, and available and future resources, as well as inflation and taxes to create just the right mix of investments. You should also know what types of investments meet your needs for short, intermediate, and long-term goals.
For the short-term, fixed income investments and cash investments may have the highest potential returns. For the long-term, equities or stocks have been shown to have higher historic returns than other investments. Therefore, if your time horizon spans decades, you may want to have a large percentage of stocks in your portfolio to potentially maximize your return.
Conversely, if you're investing for a time horizon of only a few months or a few years, it may be better to stash your cash in more conservative and less volatile investments. In general, the younger you are, the more risk you can afford. As you get older, you may want to increase the percentage of fixed income securities in your portfolio.
If your investments in stocks decline during a market downturn, your life expectancy could prevent you from regaining what you've lost. Identifying the risk level you're most comfortable with is a key factor in regaining the investment portfolio that's right for you. How much money you have or want to invest plays a big part in what your portfolio will look like.
If you don't have much, you may at first be limited to only a few investment choices. Conversely, if you have plenty of discretionary cash, you're open to a much wider choice of investments. Once you understand the personal factors that are important to building your investment portfolio, you can begin to choose from the investment choices that best fit your personal criteria.
To select investments wisely, study how they work, how they interact with other investments, and how to use them to achieve your goals. Stay financially fit, friends.