When I work with my clients on creating a personalized investment plan, the very first step I take is to understand their goals and timeline. It is by agreeing on their individual financial needs, and the time they have to accomplish them, that we can then work on building a healthy investment portfolio.
Here are five strategies to help you create a portfolio that works for you:
1. Understand how much risk you are willing to take.
A few years ago, I met with a new client to review her portfolio. When I asked her how she felt about the risk she was taking in her current portfolio, she replied, “I can’t sleep at night because I’m so worried about it.” It turned out that her portfolio was much more aggressive than she was comfortable with. Together, we made changes to the portfolio to put it more in line with her risk tolerance level and time horizon. You need to completely understand and be OK with the amount of risk you are taking.
2. Be well-diversified.
According to research, 90 percent of portfolio performance comes from being properly allocated (stocks, bonds, and cash) and diversified (so that not all of your investments are placed in the same source). Only 10 percent comes from individual investment recommendations. Having investments in different asset classes reduces the level of overall risk in your portfolio, should one or more of your holdings underperform.
3. Choose quality investments.
In addition to having a well-diversified portfolio, it is important to choose quality investments. Investments paying an abnormally high yield or dividend may seem attractive, but it is important to keep in mind the old adage, “If it sounds too good to be true, it probably is.” It is smart to mix investments that can provide stable, variable and rising dividends in your portfolio.
4. Keep a long-term perspective.
When creating your investment strategy, it is important to have a long-term perspective based on your goals and risk tolerance so that you are not tempted to sell investments at the wrong time in order to make a quick dollar, or, out of fear of a downturn in the market — both of which can hurt you further down the line.
5. Focus on what you can control.
Focusing on what you can control is key when it comes to your investments. There are a lot of factors you do not have power over, including the market and the economy, but you can control your goals and strategies for achieving them. There will always be some news headline affecting the market in the short term, but by focusing on what falls within your control and adhering to your long-term strategy, you won’t need to worry about the day-to-day noise. Remember, you are in this for the long haul.
By knowing your financial goals and your desired timeline for achieving them, you can make sound decisions in creating a healthy portfolio. Focusing on what you can control is a key strategy to investment success.
Pamela Plick is a member of the DailyWorth Connect program. Read more about the program here.