Building a profitable investment portfolio takes research, planning, and discipline. Portfolio building certainly does not happen overnight - there are no shortcuts. Fortunately, by following a few key principles, individual investors can work towards assembling durable, diversified portfolios positioned to meet financial objectives through varied economic environments. These fundamental investing tips aim to help manage risk, improve returns, and build wealth over the long haul. Here are seven tips to help you work towards assembling a portfolio that meets your financial goals.
1. Know Your Risk Tolerance
Before investing, think carefully about your ability to withstand risk. Can you sleep at night during market declines, or do you sell in a panic? Understanding risk tolerance helps guide smart investment selections. Conservative investors may opt for more bonds and dividend stocks, while those with higher risk tolerance may include some growth stocks. Also, consider your investment timeframe and specific goals, as those will impact your risk tolerance.
2. Diversify Your Investments
Diversification means spreading money across different securities to reduce overall risk. Common asset types are stocks, bonds, real estate, commodities, and cash. You can further diversify within each asset class. For example, a stock portfolio might include U.S. and international stocks across various sectors, market caps, and growth rates. Diversification allows part of the portfolio to (ideally) do well when other parts struggle. Continually monitor your portfolio to ensure proper diversification is maintained over time as market conditions change. For example, if you invest in stocks, follow the banking sector to see if this is a sector that might be of interest.
3. Reinvest Dividends
Reinvesting dividends from stocks and mutual funds allows for compound growth over long periods. The power of compounding turns a portfolio’s reinvested dividends into an increasingly meaningful income stream. Be aware of tax implications, but in general, reinvesting dividends can significantly boost long-term returns. Consider setting up automatic dividend reinvestment to enforce discipline and remain focused on long-term growth.
4. Use Dollar Cost Averaging
With dollar cost averaging, you invest fixed dollar amounts on a regular schedule regardless of price. This helps reduce risk associated with market timing and buying more when prices are high. Sticking to the plan allows positions to be accumulated at various price points. Over time, this can lower the average per share cost. Regular, fixed investments also encourage discipline and help weather market volatility.
5. Manage Costs and Fees
Investment expenses ranging from management fees to broker commissions directly reduce returns. When possible, use no-transaction-fee trading platforms and low-cost index mutual funds and ETFs. Even fees as low as 0.5% annually can eat away at long-term gains. Monitoring and minimizing fees helps maximize portfolio growth. Automate contributions into fee-efficient investments when possible.
6. Rebalance Periodically
As markets shift, asset allocations can drift away from original targets. Rebalancing involves periodically selling portions of outperforming assets to buy underperforming ones. This restores allocation targets, ensures diversification is maintained, and imposes needed discipline. Rebalance at least once annually or when allocations shift more than 5-10% from desired percentages.
7. Track Performance
Finally, identify appropriate benchmarks to measure performance for your overall portfolio and each holding according to your goals. Assess if you are taking on too much or too little risk and if your investments are truly working for you. Tweak periodically based on results and changing needs. Patience coupled with disciplined tracking fosters portfolio growth. Review portfolio performance quarterly and rebalance at least annually.
A profitable portfolio reflects personal risk tolerance and time horizon. Learning about asset types, diversification strategies, and other investing principles helps equip you to build customized portfolios. Employing these tips positions you to ultimately meet your financial objectives.