One of the most important steps to financial planning is thoroughly understanding your current financial situation, risk tolerance, and investment goals. A financial advisor can help you sort through your financial goals by evaluating your current financial situation and the likelihood that your financial plan will succeed in helping you reach your goals. Timing the market is impossible. Building a diverse portfolio will help balance your risk and profit potential.
Tips for Building a Diverse Portfolio
Diversify Your Investments
Invest in stocks, commodities, bonds, exchange-traded funds (ETF), index funds, and real-estate investment trusts (REIT). Invest in industries that are not closely correlated, so if one industry suffers a downturn, the other may not.
- Index funds are designed to track a specific index, such as the Standard & Poor’s 500 Index. Index funds are already diversified and attempt to match the performance of broad swaths of the market, which can help decrease volatility.
- You can invest in mutual funds or make your own virtual mutual fund by investing in several companies you are familiar with.
- Exchange-traded funds track an index, sector, commodity, or another asset. They can be purchased as a stock. In contrast to mutual funds, the value of exchange-traded funds fluctuates throughout the day as they are bought and sold.
- Rather than buying and renting real estate, another option is to invest in a REIT. By investing in a real estate company, you receive a share of the company’s income. The downside is that REITs typically charge exorbitant fees.
- Bonds are issued by a company when they need to raise money. Since a bond is a promissory note with interest, it is often considered to be a safer investment. However, check the company’s bond rating to determine the issuer’s creditworthiness.
Use a Buy and Hold Strategy
Invest for the long-term. Avoid making emotional or rash changes to your portfolio when the market changes. It is essential to be a disciplined investor.
Use Dollar-Cost Averaging
Another strategy to decrease the volatility and uncertainty in stock investments is to invest the same amount of money in the market regularly and for the long term. Then, as you continue to invest and buy more shares, the share price will average out over time.
Consider Foreign Stocks
If the economy in one country experiences a downturn, it can be offset by a stable or even growing economy in another country. You can do this by investing in multinational companies.
Don’t Over-diversify
Investments frequently have fees and commissions attached to them that accumulate over time. The more investments you have, the higher the fees and the more time you need to manage them. In a study from the 1970s, researchers found that the benefits of diversification decreased when your portfolio contained more than 20 to 30 securities.
Rebalance your portfolio
Once you have built your portfolio, it is critical to track its progress. Over time, you may see that market movements have unbalanced your asset distribution. In addition, your ability to contribute to your investments may change, for the better or worse, or your financial goals may have shifted. It’s important to schedule your contributions to your investment accounts and to schedule a twice-yearly or yearly check on how they are performing.
Get Expert Advice
If you are new at investing, consult with a fee-only financial advisor. A fee-only financial advisor does not earn a commission from recommending products or investments. Look for an advisor who is a CERTIFIED FINANCIAL PLANNER™ professional. This person will therefore be a fiduciary who is legally obligated to give you advice that is in your best interests.
Before investing, the most important thing is to know yourself. Consider the following:
- Your risk tolerance: Investing in the stock market has inherent risks. You can design your portfolio to be more conservative or aggressive. The higher the risk, the higher the potential for financial rewards, but this naturally comes with the risk of losing your financial investment completely.
- Your emotional responses to market changes: It is tempting to try to time the market by investing when a stock is at its lowest point in value in the hopes that it will climb to its peak. This is risky because you can only recognize a peak and a trough after the fact.
- Your age: Generally, you can afford riskier investments when you are younger because you have more time to ride out the peaks and valleys in the stock market.
Building and diversifying your investment portfolio requires creating a plan, investing at an appropriate level of risk and monitoring, and rebalancing your portfolio as needed. We can help you determine your risk tolerance and investment goals.
