How to Build a Financial Portfolio
Original post by Nicaela Crawford of Demand Media
If you haven't started a financial portfolio yet, it's never too late to begin. Although some investments take many years to reach maturity and generate profit, others are better in the short term. As noted by the website Bankrate.com, the risk factor of your portfolio depends greatly on how long you plan to invest. A 50-year-old who is about to retire may want to be a bit more conservative than a 23-year-old embarking on her career. Consult a financial adviser to determine the best investing strategy for your particular needs.
Invest in stocks. As noted in Kiplinger's "Build a Winning Portfolio," stocks are the highest-performing asset class in U.S. history. Keep in mind that there are several factors that determine a stock's value. Instead of buying a stock based on its price per share, always consider the price-earnings ratio, which takes both the price per share and the number of outstanding shares into account.
Buy mutual funds, which are collections of different stocks and bonds. According to CNN Money, mutual funds consistently outperform actively managed funds, since they are often better able to keep up with changing market conditions. However, not all mutual funds will generate returns. Mutual funds are inexpensive, and offer immediate diversification. They also are ideal for amateur investors.
Build a bond ladder. Bond laddering combines several bonds of different durations to minimize risk and maximize returns. Investors put their money into short-term bonds, which tend to have higher returns than long-term bonds, and roll them over into new bonds when the duration for each investment is over. For example, if you wanted to invest in bonds for five years, you would purchase a five-year bond, as well as a one-, two-, three- and four-year bond. When, for example, the one-year bond was finished, you would use your return to purchase another one-year bond, and do the same with the other short-term investments.
Take the right risks. As noted by Investopedia, a risky portfolio is often safer than a safe one. For example, a portfolio that only consists of government stocks and bonds is not likely to produce high returns due to inflation. Of course, a risky portfolio also has a greater chance of loss, which is why beginners should consult a financial professional to determine which risks to take.
Diversify your portfolio. Diversification is the key factor in successful investing, according to the book "Build a Winning Portfolio." Diversification helps balance risk in your portfolio. Invest in different types of stocks and bonds so that even if one investment takes a fall, others will improve or stay the same.
- Bankrate.com: How to Build a Sound Portfolio
- Kiplinger's Build a Winning Portfolio; Peter Tanous
- Investopedia: Make Your Portfolio Safer With Risky Investments
- CNN Money: Investing Your Money Basics
- Investopedia: Mutual Funds: What Are They?
- Wall Street Journal: Bond Beginners, Here's the Gist
About the Author
Nicaela Crawford is a pre- and postnatal fitness specialist certified by the American Fitness Professionals and Associates. Her writing has appeared on the "San Francisco Chronicle" website and other online publications. Crawford holds bachelor's and master's degrees in the liberal arts, with an emphasis on philosophy and literature.