Many people also downplay the importance of investing. It’s especially true among those who already have their own businesses and have become overly reliant on them as a recurring revenue source. The good news is that over the past few years, it has gotten easier to start an investment portfolio.
If you’ve saved a few thousand dollars in your bank account, you already got everything that’s needed to get started.
In this post, you’ll learn how to build an investment portfolio from scratch. It doesn’t matter if your personal finance experience is equal to zero, you should be checking out the tips below.
Consider A Robo Advisor
You might want to build a portfolio with the help of robo advisors if you’re looking for an easier way of building your portfolio. Based on the goals of investors, this class of financial advisors creates portfolios using algorithms and modern portfolio theory. The robo will recommend a suitable portfolio for you, and all you have to do is set up an account and answer a short questionnaire.
Using automatic rebalancing, many robo advisors also help investors stay on track on their investing journey. Visit this page to learn more about how financial advisors can help you in setting up your investment portfolio. If you prefer building your portfolio from scratch yourself (which is totally okay), read on.
Determine How Much Risk You’re Willing To Take On
It’s important to decide on your attitude when it comes to risk.
Answer this question: how much of your portfolio would you be comfortable losing potentially in the short-term to meet your long-term goals?
The factors that affect your attitude when it comes to risking include the following:
- Your income and/or job stability: How confident are you in your future earnings?
- Your overall asset base: Relative to the total value of all the assets you have, what’s the amount of money you’re investing?
- The kind of personality you have: Which do you prefer, thriving on the thought that your investment portfolio could greatly grow in value, even though it could see large falls potentially in the short-term, or losing sleep if your investment portfolio were to fall by a few percent in value? So, what type of person are you?
- Your time horizon for investing: For how long are you planning to invest for?
Note that the first two factors affect your capacity for loss. It refers to the ability of an investor to absorb falls in their investment value. In assessing the risk you’re able to take, make sure to take into account any loss of capital that would have detrimental effects on your current standard of living materially.
Decide On Your Goals
You need to know exactly what you’re investing in before you can start on it. Your goals are important because they’ll help you determine the right asset allocation or the right mix of investments, such as stocks and bonds, to use in reaching those goals.
Four factors influence your asset allocation. They’re the following:
- Your risk tolerance
- The cost of your goa
- Time it takes to reach your goal
- Amount of money you’re saving toward it
You’ll need to save more to make up for a conservative portfolio’s lower returns if you have large, long-term goals, but aren’t comfortable with aggressive investing strategies. The more you’re saving toward your retirement goal, for instance, the less reliance you’ll need on your investments to provide just enough returns that will allow you to reach those goals.
Choose The Specific Investments You’d Like To Have
Once you’ve determined how much risk you’re willing to take on and decided on your goals for investing, it’s time to choose the specific investments you’d like to have within each asset class.
In establishing your portfolio, it’s recommended to use funds. You can access a wide range of markets for investment in a quick and easy manner through funds. They’ll provide instant diversification for your portfolio.
At first, funds can be a little bewildering, especially after finding that they tend to fit into sub-classes just within the main asset classes. However, all you have to do is to look at the factsheets of individual funds to find out what each is trying to achieve. Doing so will help you understand where an investment fund could fit into your portfolio.
Once you’re done following the steps discussed above, it’s time to start investing. Remember that how you go about setting up your portfolio or investing into your chosen investment portfolio can vary depending on whether you’re building up with regular savings, or you have a lump sum that you can invest initially.