Step One: Create a Strategy

Just as building a home begins with a blueprint, you might benefit from having a blueprint for your portfolios. The blueprint tells the builder to develop a structure of a particular size and shape, with specific features, to suit the needs of its future owners. Similarly, your portfolio should suit your needs and specifications.

The best starting point when creating a portfolio blueprint is to focus on your investing goal. Maybe it's investing for retirement, for a child's education, or for a vacation home.

Whatever your goal, it provides vital information. It tells you the length of time you're planning on investing to reach a specific financial goal (your “time horizon”), and how much investment you can put at risk. As a general rule, the closer the goal, or the less you can afford to lose, the more focus should be placed on preserving the value of your portfolio rather than generating additional gains.

Once you've set your goal and determined your time horizon, the big question is, “How much should you put into cash, bonds, and various types of stocks?” You may already be familiar with some of the general rules of thumb that can be employed, such as using age as a guide. For instance, a 33-year-old investor may choose to put 33% of his or her portfolio into cash and bonds, and the rest into stocks.

Some investors would find that figure conservative, while others might find that it's too aggressive for their particular goals. Such rules are like buying a home without taking a tour inside. Sure, it looks good from the outside, but does it really suit you and the way you live? Maybe not. We discuss some of the considerations you should be aware of when determining what asset class mix is right for you in the Determining Your Asset Mix article.

While choosing an asset allocation strategy may seem intimidating, there are tools offered at Scottrade to help make this decision easier. We offer five target models with pre-defined asset allocations to give you a framework for building your portfolio's asset allocation. Each target model was created based on a different investment strategy; the target models can provide you with an easy way to adopt a strategy that aligns with your goals.

Read Next: Discover What You Already Own

Bonds involve risks including, but not limited to interest rate risk, reinvestment risk, inflation risk, call risk, liquidity risk and a risk of loss of principal. New issue offerings are sold by prospectus or offering circular available at Investors should read these carefully.