How To Build An Investment Portfolio (2024)

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Successful investing means working towards both short-term and long-term financial goals. But building an investment portfolio to reach both types of goals can be a challenging task.

Whether you’re trying to choose a financial advisor or taking a DIY approach, the following six-step checklist can help you create and maintain an investment portfolio for any goals you may have.

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What Is an Investment Portfolio?

An investment portfolio is a collection of assets you buy or deposit money into to generate income or capital appreciation.

Assets include cash on deposit in a money market account or certificates of deposit, real estate or anything you can purchase with a brokerage account—stocks, exchange-traded funds, mutual funds, bonds, crypto and more.

Investment portfolios may involve one or several types of accounts. For instance, your employer’s 401(k) plan is one type. But as you add other goals—like saving for a home down payment or for college—you’ll likely add more investment accounts to your portfolio. Your complete portfolio might include a high-yield savings account and a 529 plan.

It’s important to consider how each type of investment account works separately and in conjunction with each other. Don’t put all your eggs in one basket, because without realizing it, you might wind up investing in the same assets in multiple accounts. As you’re about to discover, not all investments align with all goals—or investors.

How to Build an Investment Portfolio in Six Steps

Building an investment portfolio can be broken down into the following simple steps. Each step sets you up for success with the next step. Ultimately, you’ll have a better chance of building a portfolio that aligns with your investment style and the goals you want to achieve.

1. Start with Your Goals and Time Horizon

When building an investment portfolio, the first step is to make a list of your financial goals.

“Without an end goal, why you want to invest doesn’t really matter,” says Brian Robinson, a certified financial planner (CFP) at Sharpepoint.

Once you have your goals laid out, sort them by time horizon, which is nothing more than how long you’ll need to hold the investments until you require the money.

  • Short-term goals are those where you’ll need the money within 12 months.
  • Medium-term goals take between one and five years to accomplish.
  • Long-term goals take more than five years to reach.

For example, if you’re saving for retirement 30 years from now but need to buy a new car this year, you have one long-term and one short-term goal.

2. Understand Your Risk Tolerance

Now that you know when you need the money for each goal, you can decide your risk tolerance—how much you’re willing to lose in the short term to achieve each goal.

“The longer the time horizon, the more aggressive you can be,” says Denis Poljak, a CFP with Poljak Group Wealth Management, since you have more time to recoup short-term losses. He says short-term goals generally require a more conservative strategy since you likely can’t afford to lose what you’ve saved.

Risk tolerance works hand-in-hand with time horizon. For instance, if you take on too little risk when saving for retirement 30 years away, you could fall short of your savings goal. But if you’re five years from retirement, taking on too much risk could mean losing money without a chance to make up the losses.

Your tolerance for risk is ultimately a balance between what’s required to reach your goals and how comfortable you are with market swings.

3. Match Your Account Type with Your Goals

Before you pick investments, you need a place to put them. That’s why you want to build an investment portfolio using an account that aligns with your investment goals.

  • Tax-advantaged accounts like IRAs and 401(k)s work best for long-term, retirement-related goals and can accommodate any risk tolerance level.
  • Taxable online brokerage accounts work well for mid- to long-term goals where you want more upside potential than a lower-risk deposit account.
  • Deposit accounts like CDs, money market accounts and high-yield savings accounts work best for short-term goals where you want a bit of growth but can’t afford to lose money.

4. Select Investments

Now it’s time to put your goals, time horizon and risk tolerance to work as you select investments to reach your goals.

Stocks

Stocks, also known as equities, are units of ownership in a publicly-held company. You can buy shares of thousands of companies based in the U.S. and abroad. They tend to be a higher-risk investment but also offer a greater chance of growing in value than bonds or cash alternatives.

Bonds

Bonds turn investors into lenders. Buying a bond allows you to lend money to a company, entity or municipality. In exchange, the bond issuer pays you interest on your loan until they repay it in full. Bonds are typically less risky than stocks, but there are also higher-risk bonds like junk bonds.

Funds

If you can’t afford to buy a single bond or share of stock—or simply want to spread out your risk between multiple stocks and bonds—you can invest using exchange-traded funds (ETFs) and mutual funds.

These investments are baskets of securities. When you buy shares, you own a bit of everything in the basket. Your risk will vary depending on the type of fund.

Alternative Investments

If you can dream it, you can invest in it. From precious metals like silver and gold to real estate, cryptocurrencies, hedge funds and even commodities like wheat, there are ways to invest beyond stocks and bonds to diversify your portfolio. Alternative investments are often higher risk than stocks and bonds.

Cash and Cash Alternatives

Investments like CDs, savings accounts and money market funds offer low-risk ways to set aside cash but still earn a (very) modest rate of return.

5. Create Your Asset Allocation and Diversify

After you decide the types of investments you want in your investment portfolio, it’s time to decide how much of each you should buy. While you might be tempted to throw every dime you have into stocks to juice returns, Robinson advises his clients to think differently.

“Making money is great, but how much did you not lose on the way down?” he says.

Asset allocation keeps you from putting all your eggs in one basket and instead helps you divvy up your money in a way where you can enjoy capital appreciation while limiting losses. For example, if you have a high risk tolerance and a 30-year time horizon, you might allocate 90% to stocks and 10% to bonds. Someone with a moderate risk tolerance might choose a portfolio that’s 60% stocks and 40% bonds.

Once you decide on asset allocation, you can diversify your investments within those asset classes. For instance, you might split up your 90% allocation stocks between large- and mid-cap stocks and then diversify stocks across multiple sectors like healthcare, industrials and technology.

To help you get started, you can review popular asset allocation models to help pinpoint your ideal portfolio.

6. Monitor, Rebalance and Adjust

Once you hit “buy,” your investment portfolio still needs ongoing care and attention. That’s why it’s important to monitor and adjust your portfolio regularly.

For example, you might check in on your portfolio twice a year to ensure your asset allocation is still aligned with your goals. You might need to rebalance your holdings if the market has been volatile. If you’re investing through a robo-advisor, many take care of rebalancing for you.

You may also need to adjust your investment strategy as life changes. Getting married or divorced, becoming a parent, receiving an inheritance or nearing retirement are all life events that could necessitate rethinking your current investment strategy. The best investment portfolios grow and thrive like house plants—with regular care, attention and feeding along the way.

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Now, let's dive into the key concepts outlined in the Forbes Advisor article about building and maintaining an investment portfolio:

Investment Portfolio Definition:

An investment portfolio is a diversified collection of assets designed to generate income or capital appreciation. These assets encompass a broad range, including cash, certificates of deposit, real estate, stocks, exchange-traded funds (ETFs), mutual funds, bonds, cryptocurrencies, and more.

Types of Investment Accounts:

Investment portfolios may involve various account types, such as employer-sponsored 401(k) plans, IRAs, taxable online brokerage accounts, and deposit accounts like CDs, money market accounts, and high-yield savings accounts.

Building an Investment Portfolio in Six Steps:

  1. Start with Your Goals and Time Horizon:

    • Identify financial goals and categorize them based on time horizons (short-term, medium-term, and long-term).
  2. Understand Your Risk Tolerance:

    • Assess how much risk you are willing to take for each goal, considering the relationship between time horizon and risk tolerance.
  3. Match Your Account Type with Your Goals:

    • Choose investment accounts that align with specific goals, such as tax-advantaged accounts for long-term goals and taxable brokerage accounts for mid- to long-term goals.
  4. Select Investments:

    • Choose from various investment options, including stocks, bonds, funds (ETFs and mutual funds), alternative investments, and cash alternatives.
  5. Create Your Asset Allocation and Diversify:

    • Determine the proportion of each investment type in your portfolio to achieve a balanced asset allocation. Diversify within asset classes for risk management.
  6. Monitor, Rebalance, and Adjust:

    • Regularly review your portfolio to ensure it aligns with your goals. Rebalance if necessary, considering changes in market conditions. Adjust your strategy based on life events or changing circumstances.

Expert Insights:

  • Consideration of Risk and Time Horizon:

    • Longer time horizons allow for more aggressive strategies, while short-term goals may require a more conservative approach.
  • Asset Allocation and Diversification:

    • Asset allocation helps distribute investments to manage risk, and diversification within asset classes further enhances risk mitigation.
  • Ongoing Portfolio Management:

    • Portfolios require continuous monitoring, and adjustments may be needed based on changes in life circumstances or market conditions.

This comprehensive approach outlined in the article provides a solid foundation for individuals looking to navigate the complexities of investment portfolio construction and maintenance, whether they choose a DIY approach or work with a financial advisor.

How To Build An Investment Portfolio (2024)
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