Keeping a portfolio with a healthy mix of assets that are properly diversified may allow you to weather market shocks more easily.
3 Questions to Ask in Building Your Portfolio
Determining how to allocate the money in your portfolio can be challenging.
Should you build a portfolio geared toward equities that takes on a lot of risk? Or should you build a portfolio that is less susceptible to large market swings?
“No two people have the same ideal portfolio; which means no two portfolios will likely be the same given the many variables,” said Joe Correnti, senior vice president of brokerage product at Scottrade. “However, investors can ask themselves several basic questions to help them move in the right direction.”
When you’re working to build your ideal portfolio, here are some questions you want to keep in mind.
What are your financial goals? Before determining the makeup of your portfolio, you need to consider what you actually want it to accomplish.
For instance, maybe you’re looking to build a portfolio to reach a very long-term goal. Or maybe you’re looking for a portfolio that provides reliable income for your golden years. Regardless, your financial goals will tell you a lot about the make-up of your portfolio.
What is your time horizon? Your time horizon depends on when you need the funds, and it’s quite likely you will have multiple time frames based upon various financial goals over your lifetime. For instance, if you’re 25 and are looking to retire at 65, you will have a longer-term outlook and are more likely to be able to recover from market downturns. In this case, you may want to consider investing the majority of your portfolio in stocks. Over long periods of time, stocks typically do exhibit the most volatility; however, they tend to outperform other asset classes with lower volatility.
If you’re 62 and looking to retire at 65, your portfolio won’t have as much time to recover if the market heads south. In this scenario, you may want to consider investing more of your portfolio in other assets, such as bonds. Bonds, while generally not providing returns as high as stocks over the long-term, tend to be less volatile.
What is your risk tolerance? How well you can stomach market fluctuations helps to determine your risk tolerance, which should guide you in building an ideal portfolio.
If you get very anxious during a market downturn, you have a low risk tolerance and may want to consider building a portfolio largely with assets such as bonds and cash. Conversely, if a big plunge in the market is no big deal to you, consider building a portfolio with more exposure to stock.
“At the end of the day, you want to build a portfolio that helps you achieve your objectives while also allowing you to feel at ease with your decisions,” Correnti said.
But remember, your risk tolerance will help determine your financial goals. For example, if you need big returns over a short period of time, but you have a low risk tolerance for volatile stocks, you might have to adjust your goals and expectations.
What are the factors that you consider when building your ideal portfolio?
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Bonds involve risks including, but not limited to interest rate risk, reinvestment risk, inflation risk, call risk, liquidity risk, credit risk, market risk, default risk, event risk, and a risk of loss of principal. New issue offerings are sold by prospectus or offering circular available at www.scottrade.com. Investors should read these carefully.
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Before you can achieve success in your financial portfolio, you should consider setting clearly defined investing goals.
Scottrade Brokerage President Peter deSilva was drawn to the firm by its client-first approach. This approach was demonstrated with the company named “Highest in Investor Satisfaction with Self-Directed Services” by J.D. Power.