If you’re interested in growing your money to meet long-term financial goals, you need to maintain a strong portfolio. As an individual, it can be a little harder to determine which funds, stocks, and bonds make good investments by balancing your personal goals and the amount of risk you’re willing to take. Learn more about creating a stock portfolio with help from the advisors at Cash Factory USA.
1. How to Choose Assets
When you’re trying to sort through the different assets in which you can invest your money, you need to consider a few important things, including:
- Your age
- How much time you have to grow your investment
- How much capital you have to invest
- Your current and future income needs
- Risk tolerance
A 22-year old just beginning his career will have a completely different strategy than a retiree living off savings.
Conservative vs. Aggressive
The more risk you can bear, the more aggressive your portfolio will be. You will see a lot of swing in the numbers from day to day, and you will devote more money to equities than to bonds and fixed income securities. Conservative investors will create a portfolio that assumes less risk and look for long-term growth potential in mutual funds and other more stable account types.
2. Creating Your Portfolio
You’ve chosen your asset allocation and now you need to divide your capital. You have two basic options: equities and bonds. Equities can be divided between different industrial sectors or foreign stocks while bonds could be allocated to short- and long-term government debt or even corporate debt.
Stocks have varying levels of risk and you should consider the sector, stock type, and market type of potential selections. You can use stock screeners to analyze the companies and create a short list of potential options. This is a work-intensive process and requires stock portfolio management and regular monitoring.
When creating a stock portfolio with bonds, the various factors you consider here include maturity, bond type, the credit rating, and the coupon along with the general interest or return rate.
Choosing Mutual Funds
Investing in mutual funds allows you to put your money with that of others for stock portfolio management by a professional team. They charge a fee for their services that comes out from your returns. A 401(k) is one type of mutual fund that many employers offer.
ETFs (Exchange-Traded Funds)
If you don’t want to leave your money in a mutual fund, you can opt for an ETF. These are pretty much mutual funds that are traded like stocks. They consist of a large group of stocks (instead of investors) that are passively managed. These funds have lower management fees and provide the same type of diversification as mutual funds.
3. Reanalyze and Reassess
Even once you’ve chosen your investments, to properly manage your stock portfolio, you should analyze and rebalance it from time to time. The returns on your investments and price changes could affect what you choose to do with your invested funds.
Changes in your personal life and risk tolerance will also determine how you handle changes to the stock portfolio you created. Adjust, rebalance, and rethink your strategy periodically.
4. Reallocating Funds
When you’ve examined your investments and decided where you need to reduce or increase your funds, it’s time to consider the tax implications on your assets. When you sell assets, you will need to pay capital gains taxes that vary from tax bracket to tax bracket. What percentage will you be paying if you sell now? You could be paying up to 20% of your gains.
Sometimes, the only option is to sell. If you’re seeing a dive in your investments, you may want to get out before the stocks fall. Getting rid of the stocks or pulling your money out of a mutual fund may be your only choice for preserving your investment regardless of the tax implications.
Investing On Your Own
During the stock portfolio creation process, you must remember to maintain diversity. Spread your assets across a number of different industry sectors and subclasses. Diversity is what protects you from a crash or drop in a particular sector, as it’s rare to see a drop across all industries. Mutual funds and ETFs are the easiest way to develop this diversity.
At Cash Factory USA, we’re proud to help you decide what to do with your capital. Explore our other blogs today for more financial advice.