Investing Ideas

5 steps to building a profitable investment portfolio

Given the sheer amount of research and the technicality involved, building a portfolio may seem like a complex task to individual investors.

However, it gets easier with a bit of guidance to give you direction on the crucial aspects you ought to pay attention to. Here is a tried-and-tested roadmap to building a rewarding portfolio.

Diversify

One of the simplest ways of building a profitable portfolio is by investing in various asset classes such as stocks, ETF, indices, CFD. This goes a long way into maximizing returns and minimizing risks. The main asset classes consist of bonds, equities, and mutual funds. When choosing each of these asset classes, it is important to consider your risk tolerance. Bonds tend to be safer compared to equities, thus make an ideal choice of investment for investors with low-risk tolerance.

Equities and mutual funds are similar. The latter consist of several securities traded as single unit helping you achieve a balanced investment portfolio in one go. Also, mutual funds are less volatile compared to trading individual securities.

Determine Your Asset Allocation

Having understood the different asset classes, it is important to decide how much you should allocate to each investment class. The idea is to allocate money to assets depending on your time frame. For young investors with a long time horizon, you can enjoy the luxury of investing in risky assets, which also promise high returns. As you grow to become a less aggressive investor, your portfolio should largely comprise of bonds and large-cap stocks that often come with less risk.

To make it easy for investors to decide on asset allocation, there are several online financial-planning survey sheets to determine your portfolios’ composition. Although these methods may work, it is prudent not to rely on them solely as they may not consider other factors such as marital status.

Pay Attention To The Taxes

Taxes are one of the biggest drains on investment returns. As such, failing to follow tax-efficient investment strategies can adversely short charge your portfolio. There are two types of account that every tax-smart investor should consider; these are taxable accounts and tax-advantaged account. Generally, investments that tend to lose much of their return to taxes are best placed in tax-advantaged accounts.

Similarly, investments that lose less of their returns to taxes are suited for taxable accounts. For instance, securities that you plan to hold for more than one year are good candidates for a taxable account, while those you plan to hold for a year or less should be in tax-advantaged accounts.

Reduce the Trading Commission

Trading commissions can take a huge chunk off your investment, especially when fuelled by the market’s volatility. Often, most brokers charge an initial commission for opening trade and another additional commission for executing the trade. While these may seem less of an amount to worry about, it can accumulate to significant amounts especially after frequent trading.

For this reason, investors try to minimize their number of trades, in turn, reducing the trading costs. Although this may work, what matters is the amount you are willing to invest. This means that your trades should make enough of percentage gain to cover commission costs while leaving you with reasonable returns. This way you can trade as frequently as much as you want without worrying about exorbitant trading fees.

Reassess Your Portfolio

Building a profitable portfolio requires constant management to keep it in line with your financial goals. As time goes by, your risk tolerance, as well as time horizon, reduces. Adjusting your portfolio also helps achieve equilibrium which is offset by underweight stocks. In turn, you maximize your returns by allocating more or less money to the securities in question.

It is important to note that when selling securities to rebalance your portfolio, taxes will be incurred. So, don’t be quick to sell securities as a way of rebalancing your portfolio. Instead, focus on starving off funds from particular security and invest in another one. This way you will achieve equilibrium without incurring significant taxes.

Summary

Building a portfolio is not as difficult as most people perceive it to be. With consistent management and re-assessment, it is easy to build a rewarding portfolio. To help you get started, be sure to follow the above guidelines for an insight on what you should pay attention to.

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