Updated: Jun 30, 2021
WHERE TO START
Despite all this talk of double digits returns, it is not as easy as just throwing your money into the stock market and coming back in a few years to collect your winnings. Start by identifying your investment goals.
The more understanding you have around your own investment needs and objectives, the higher the probability of you sticking with your investment plan. During short-term fluctuations, you will be able to focus on your underlying longer-term goals instead of being all consumed by the current volatility.
Building an investment portfolio might seem intimidating, but there are two major steps you can take to make the process less daunting.
1. MAP YOUR INVESTMENT TIMELINE
Identify your financial goals and how soon you will need the money you plan to invest.
2. DETERMINING YOUR RISK TOLERANCE
Once you have determined the level of risk you are willing to take, you will be able to choose what mix of investments work best for you (stocks, bonds, mutual funds, real estate etc.)
MAPPING YOUR INVESTMENT TIMELINE
When do you need the money you’re investing, and is that date set in stone or flexible?
Figuring out your time horizon is vital. The academics of the world will tell you that starting your investment portfolio when you are about five years old and only touching it moments before your death is the optimal way to build portfolio wealth.
Of course, theoretically, through the magic of compounding, they are correct, but this approach isn’t exactly practical. It doesn’t lend itself very well to our ever-changing goals and needs. College, starting a family, buying a house, changing career, retirement, all these are financial milestones that will invariably adjust your financial situation, so be aware of your long-term financial plan but be mindful that these goals may need to be adjusted somewhat as your priorities change along the way.
Your timeline helps inform how aggressive or conservative your investment strategy needs to be. Most investment goals can be mapped to;
IF YOU’RE HOUSE SHOPPING, WEDDING PLANNING OR CAR BUYING WITHIN THE NEXT YEAR, KEEP THOSE NECESSARY FUNDS IN A SAVINGS OR MONEY MARKET ACCOUNT.
Any money that you don’t need in the next year should be invested, investing with at least a 5-10-year timeline in mind where possible.
Here is where the fun begins. Any cash you don’t need in the coming year can go to work for you every day in the stock market, taking bigger risks and affording you larger profits.
When you invest with money that you have no immediate need for, you protect yourself from the short-term fluctuations of the stock market. Over the course of a year or two, you could see your investment suffer a loss,
but on a longer timeline, the stock market and
great companies get bigger and more profitable.
DETERMINING YOUR RISK TOLERANCE
To create an appropriate investment plan, you will need to ascertain your own risk tolerance. (the level of risk you are willing to take). Overestimating this will have you jumping ship at the least opportune time and underestimating this will likely leave you disappointed with your portfolio returns over time.
Everyone is different so take some time to analyse what range of losses you can comfortably be exposed to both physically and mentally. It is crucial that you don’t overlook the latter. Just because you can physically survive a significant decline in your portfolio doesn’t guarantee that the mental anguish from watching your assets decline won’t spur you into unnecessary action, ultimately deviating from your original plan.
Your willingness to take risk is the key driver behind your diversification decisions or, put more simply; it will dictate the mix of assets you hold in your portfolio. The goal is to strike the right risk-reward balance, picking investments that will help you achieve your goals but don’t keep you up at night worrying.
BUILDING YOUR PORTFOLIO
Finally! Provided you understand your own risk tolerance and investment timeline; it’s now time to start building your investment portfolio. This is simply just selecting the mix of assets that are most in line with your personal investment goals.
When you’re creating a portfolio from scratch, it can be helpful to look at model portfolios to give you a framework for how you might want to allocate your own assets.
As discussed in earlier chapters, all asset classes offer various advantages and disadvantages, so it is imperative to understand what each asset class has to offer before determining which assets are most aligned with your investment goals.
You guessed it, an aggressive portfolio is ideal for someone with a higher-risk tolerance and a lot of time to invest, while a conservative portfolio is better suited to those with lower-risk tolerance and a short amount of time.
The potential combinations here are endless, and no one size fits all. Carefully consider your risk tolerance when deciding what allocation works for you.
ROME WASN’T BUILT IN A DAY
And neither was your investment portfolio. I get it, you have watched the markets rally, and your fear of missing out on even more gains has you itching to go all in all at once. Take a breath; building a portfolio isn’t something that should happen overnight. Every investor has their own way of building up a portfolio, but dollar-cost averaging is a popular and effective way to start.
In dollar-cost averaging, you choose a few investments and buy a set amount at regular intervals, be it every month or every quarter. This smooths out the purchase price over time.
It also removes emotion from the process, as you purchase the same dollar amount every month regardless of price. If the stock has gone down, you get more shares for the same amount of money. A discount sale if you will.
So instead of wrestling with the idea of putting $1,000 in today, invest $250 every week, over the next month.
Learn how to set up your brokerage account, create your watchlists and pick your first stock by downloading my FREE e-book on my homepage here
Next up. INVESTING MISTAKES TO AVOID