You can start building your portfolio with as little as a few hundred dollars and add to that amount as you earn and save more money.
1 – Weigh your tolerance for risk
Risk and return go hand in hand, but a key is striking the right balance for you.
That’s where your risk tolerance comes in, which is simply how you feel about taking investment risk.
Generally speaking, the more stock investments you own, the more ups and downs you’ll experience in your portfolio. But you’ll also increase your potential for higher long-term returns.
2 – Understand your time horizon
Another major factor to consider is when you’ll need your money.
Typically, the longer you have to invest, the more you can handle short-term market swings, so you may have a larger allocation to stocks, stock mutual funds or exchange-traded funds. However, when you get closer to needing the money for your goals, you can shift to more conservative investments, such as bonds, CDs or bond funds.
Each of your goals is likely to have a different time horizon. If your goal is retirement, it depends on when you want to retire. If one of your goals is paying for college, however, your time horizon is based on when your children may be going to college and how many years of school you plan to pay for.
Since each goal may have a different time horizon, each one may have its own portfolio objective.
3 – Consider your life stage
It’s important to understand how your life stage affects your financial situation. For example, if you’re younger and retirement is a long way off, your investments will probably look different than if you plan to retire in five years.
4 – Find the optimal portfolio mix for you
The right portfolio objective for you will address the complete spectrum of your needs as an investor. There are characteristics and trade-offs associated with each of those needs, including risks and returns.
Start with your time horizon and comfort with risk. Next, consider factors such as your income needs, existing savings and your desire to leave a legacy.
