4 Steps to Help Get Your Portfolio Just Right

How Can You Build a Goldilocks Portfolio?

Trying to figure out the right mix of securities in a portfolio can be confounding for many investors: Too many stocks might make your portfolio more risky than you like; too many bonds might not provide the long-term performance you need to reach your goals.

While it’s probably impossible to devise a perfect portfolio, applying a few tactics could help get you closer to the Goldilocks standard – a portfolio that’s just right for you.

“Ideally, investors would follow some basic rules in building and maintaining a portfolio,” said Joe Correnti, senior vice president of brokerage product at Scottrade. “Without those rules, you could end up in a bad place with a portfolio that’s too risky or too conservative.”

Investing Goals

While it’s a great idea to start setting aside money, it’s an even better idea to have specific goals in mind. Simply put, how do you plan to spend the money you’re saving?

Obvious goals might include a vacation, children’s education and retirement. But life throws lots of curves and goals change over time. Make sure you review and update your goals every year or so.

Investing Time Horizon

Once you’ve established your goals, you can bucket them into categories like short-term (1-3 years ahead); mid-term (3-8 years); and long-term (8+ years). 

It’s important to recognize that goals will move from one bucket to another over time. For example, consider the retirement investments for a 34-year-old versus a 64-year-old counterpart. The younger investor probably wants to build wealth – a long goal where short-term losses can be tolerated.  The older investor wants to preserve wealth – a short-term outlook to protect retirement savings from significant losses.

Portfolio Risk

Risk is perhaps the trickiest component when trying to develop your Goldilocks portfolio. There are complex mathematical formulas that can help you determine the level of risk that’s right for you. And then there are powerful emotional factors that lead people to buy high and sell low.

Ultimately, you might not understand your risk tolerance until you experience a deep drop in stock prices. In general, however, the longer your time horizon, the more risk you can afford to take because the markets and your portfolio have time to bounce back. In addition (and again in general), equities (like stocks) are riskier than fixed-income securities (like bonds).

If you’re a Scottrade® client, you can log in and use the Portfolio Review Tool to help you find investments and build a portfolio that lines up with your tolerance for risk.

Rebalancing

This step is often overlooked by investors. Rebalancing means you should periodically make changes to your portfolio to keep it within your investing goals and risk tolerance. There are several reasons why you might need to rebalance:

  • If your investing goals change.
  • If your appetite for risk changes.
  • If your portfolio mix becomes lopsided based on the returns of your holdings. For example, if stocks fall dramatically, you might need to sell fixed-income securities and buy more equities to get your portfolio back in balance.

Next Steps: If you want to learn more about the Portfolio Review Tool, you can review a series of comprehensive articles. If you want to research possible investments, you can visit Scottrade’s free Quotes & Research page. Scottrade® clients can log in and use an enhanced version of Quotes & Research. 

The content provided is for informational and/or educational purposes only. The information presented or discussed is not, and should not be considered, a recommendation or an offer of, or solicitation of an offer by, Scottrade or its affiliates to buy, sell or hold any security or other financial product, or an endorsement or affirmation of any specific investment strategy. You are fully responsible for your investment decisions. Your choice to engage in a particular investment or investment strategy should be based solely on your own research and evaluation of the risks involved, your financial circumstances, and your investment objectives. Scottrade, Inc. and its affiliates are not offering or providing, and will not offer or provide, any advice, opinion or recommendation of the suitability, value or profitability of any particular investment or investment strategy.

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 by contacting Scottrade. Investors should read these carefully.

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