Are you looking to build wealth without doing anything? Have you decided that it’s time to make passive income while you’re enjoying your life? Are you planning for something exciting in your future?
If you answer ‘yes’ to any of these questions, you’ve come to the right place.
You need to learn how to build an investment portfolio. By pulling together different types of investments, you can make money while doing nothing. That’s right: your investments will make money while you sleep.
To learn more about how to create an investment strategy that works for you, keep reading. We have everything you need to know.
What Is an Investment Portfolio?
An investment portfolio is a collection of several different kinds of investment accounts. This may include stocks, bonds, cash, and other kinds of investment accounts.
The kinds of investments that you have in your investment portfolio can determine how successful your portfolio is. And, the diversification of your portfolio will determine how stable your investment earnings are.
Each investment portfolio will differ from person to person. The portfolio will take personal characteristics into consideration. These will include risk tolerance, personal financial goals, and timing.
By understanding what your money wants and needs are, you can build an investment portfolio that will improve your financial condition.
How to Build an Investment Portfolio
Your personal investment portfolio will differ from everyone else’s. To determine the kinds the investments that should make up your portfolio, you have to figure out what characteristics you have as an investor.
Are you risk-averse? Do you need money fast? Are you willing to lock away your money for a long time?
Once you understand your investment personality, you can start by investing small amounts of money into various investment accounts.
1. Determine Your Risk Tolerance
The first step to determining your personal investment characteristics is to weigh your risk tolerance. Your risk tolerance is the amount of risk that you can comfortably accept as an investor.
Someone with a high-risk tolerance is going to be okay with a more volatile market. So, they aren’t likely to be as upset if their investments were to decrease every once in a while.
Someone with a low-risk tolerance doesn’t like volatile markets. They want a more secure investment that is guaranteed to increase over time.
The key to discovering the right risk tolerance for you is by striking the right balance. You have to figure out the amount of risk you’re willing to have along with the number of returns that you’d like to get. Once you find this balance, you’ll be in a better position no matter what the market looks like.
2. Consider When You Need Your Money
Investments are usually a long-term commitment, but they don’t have to be. In fact, there are several different time horizons to consider when you’re making investments.
So, you have to ask yourself when you’ll need the money that you’re investing. Are you looking to make a quick buck or are you in it for the long haul?
The longer you keep your money in the market, the more likely it is that you’ll be able to handle short-term swings. If you only keep your money in the market for a short amount of time, the money won’t have much time to grow.
In general, people who need their money soon should opt for more conservative investments. These include bonds, certificates of deposits, and bond funds.
People who have time to let their money sit in the market can opt for more volatile investments such as stocks, stock mutual funds, and exchange-traded funds.
Most people have more than one time horizon running at once. For example, you may be saving for your child’s college fund at the same time that you’re saving for retirement. While it could happen, you’re probably not going to need all of this money at the same time.
3. Think About Your Life Stage
The life stage that you’re in affects your financial stability. So, you need to consider your financial stage when you’re building your investment portfolio.
For example, someone who’s 20 years old is going to save for retirement much differently than someone who’s 40 years old.
Younger individuals are going to focus on growing their investments, while older individuals are going to focus on balancing growth and income.
Another common change is risk tolerance. You may have just figured out your risk tolerance for now. But, your tolerance is likely to change as your life situation changes.
You may be more willing to take on risks when you’re young and single, but you’re likely to be more risk-averse when you’re married with children.
Consider the life stage that you’re in right now and determine what kind of investments you may want to add to your portfolio.
4. Review the Mix of Investments You Want
Now that you understand the types of investments that you want in your portfolio, you need to find the optimal portfolio mix. The right portfolio mix will address all of your investment needs and wants. You’ll be able to address both short and long-term investments.
Mixing these investments together will result in a mix between income and growth.
Many investment companies offer pre-made portfolios for people with specific goals. So, you may choose to use these portfolios rather than create your own.
Alternatively, you could work with a financial advisor to make the right mix of investments.
5. Implement Your Investment Strategy
Once you’ve determined your risk tolerance, your money needs, your life stage, and your investment preferences, you can start to implement your investment strategy. By researching different investment types, you can find the investment portfolio that suits you the best.
As you’re building your investment portfolio, you should be comfortable with change.
While you don’t want to change things too often, you may have to make adjustments as you learn more about your investment preferences. So, you should spend the first few weeks examining your investment choices so that you can learn more about your choices and how you may want to change them in the future.
Bonus Tip: Hire a Financial Advisor
If you’re still lost after reading about how to build an investment strategy, you may need to hire a financial advisor. An experienced financial advisor can help you build a customized portfolio that fits your needs and wants for your investment portfolio.
With their education and experience, they’ll be able to help you set and meet various financial goals. They can help with school funding, retirement savings, and more.
When you meet with your financial advisor, they’re going to ask you several questions about your financial aspirations. So, when you’re meeting for your appointment, you should come with plenty of information at the ready. Here are some of the things that your advisor may ask:
- When you want to retire
- What your current income is
- How much you’re looking to invest
- What your future goals are
The more information you bring, the better.
You can also call your financial advisor before the meeting and ask them what information they’d like you to bring.
What Should I Invest In?
One of the hardest yet most important parts of investing is choosing what to invest in. There are so many options that all give different levels of return.
The things that you’re going to invest in will depend on your risk tolerance as well as your financial goals.
The best thing to do is invest in a variety of options. Between stocks, bonds, real estate, and other options, there’s plenty to choose from.
Let’s differentiate the options that you have so that you can make the best choices. Whether you’re working with a financial advisor or not, you should understand what these different investment opportunities are.
Investing in Stocks
Stocks are a basic investment necessity. This type of investment is consistent and is the best way for the average person to build wealth over long periods of time.
Stocks have an incredibly good return record, even better than long-term investments like savings yields and bonds.
Because of this history, stocks should serve as a foundation for anyone’s investment portfolio. Without stocks, your investment portfolio isn’t complete.
That said, not everyone should invest in the same amount of stock. The amount that you should invest in depends on what your investment goals are.
As you’re investing in stocks, you may note high volatility. Stock prices may shift quickly over short periods of time. And, you could incur permanent losses from your stocks.
However, by keeping your stock investments in the market for a long period of time, you can remove much of this volatility.
Investing in Bonds
Bonds are a great way to keep wealth if you’ve already had the opportunity to grow it. Bonds are loans that may go to a company or a larger government. The loan goes to different entities depending on the type of bond.
Because these loans are easier to calculate overtime, their volatility is much lower than that of stocks. In fact, bonds are a relatively safe investment.
Investing in Real Estate
Real estate investing may seem out of the question for most people, but it’s much more attainable than it seems like it is. There are plenty of ways for people of any financial level to invest in real estate.
All you have to do is find an investment property and secure financing. As long as you can make enough money through renting, you should be able to afford the real estate with a little extra leftover.
Because real estate runs on different recessionary periods than regular investments, it is a much more stable investment.
Invest in Brokerage Accounts
The kinds of accounts that you invest in matter. In fact, the kinds of accounts that you invest in will affect how your investments are taxed.
You should look for investment accounts that protect your wealth (i.e., tax-advantaged accounts). These will help you save money on taxes while building wealth.
Most of these accounts are for school savings and retirement savings. So, you should make sure that you’re taking advantage of these accounts on top of any other investment accounts that you may have.
To protect your income, you should have a wide variety of investments that are in different markets. That way, you won’t lose all of your investments if one market tanks.
Managing Your Investment Strategy
You need to be able to manage volatility if you’re going to have multiple investment accounts. This is especially if you’re entering into an unstable financial period such as retirement or young adulthood.
If you’re about to enter into one of these life periods, it may be time to lower the volatility of your investments by moving them into bonds and out of stocks. This will protect your assets while you’re entering into the more unstable period.
Avoiding the Costs of Investing
One of the biggest problems with investing is the potential permanent losses. If you don’t have a diversified portfolio, you’re increasing your likelihood that you’re going to permanently lose the capital that you’re investing.
So, you should invest different amounts of money into various accounts and investment types. When one market crashes, you won’t have to worry about losing everything at once. Your other investment types will be safe as long as those remain stable.
Learn More About How to Build an Investment Portfolio
Whew! You made it!
That was a lot to learn about how to make an investment portfolio. But, now you know the best way to go about building a strong portfolio for you and your financial goals.
However, there’s always more to learn. Market recommendations are constantly changing.
And, while stocks may always remain the baseline for everyone, things may switch up as markets shift.
If you’re unsure about how to monitor markets and investment types, we highly recommend that you hire a financial advisor. They can help you set and meet financial goals.
You can also visit the rest of our blog to learn more about investing.
