Building an investment portfolio can seem complicated, pushing away beginner investors. But it doesn’t have to be—anyone can start investing with the right knowledge, tools, and a little bit of research. It’s important to note that all investing comes with risks; there’s no guarantee that you’ll make a profit or that you won’t lose money.
An investment portfolio is simply a collection of assets like stocks, bonds, and exchange-traded funds. Investment portfolios are more of a concept, not a physical item, since almost all investing is done digitally now, but it’s helpful to view all of your individual investments as pieces of a bigger picture. For example, you might have multiple investment accounts, like a retirement savings account and a brokerage account, and it’s important to look at them collectively when deciding how to invest them.
What comes to mind when you think about building an investment portfolio?
If you picture spending hours picking individual stocks, watching their performance each day, and buying and selling constantly, you’re in for a pleasant surprise. For the average investor, it’s much less involved. You can build long-term wealth with an investment portfolio with minimal effort after the initial setup.
Here’s how to build an investment portfolio for beginners.
The first thing you need to do as a new investor is choose the right investment account for your needs. For most investors, this means opening a regular, taxable brokerage account that allows you to invest in stocks, bonds, mutual funds, and exchange-traded funds. With these accounts, you’ll have to pay tax on your investment profits and dividends, but you’re free to withdraw your money at any time. You can open an investment account with any online broker.
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Asset allocation is simply the percentage of each type of asset your investment portfolio contains (we’ll cover those in the next step). Two important items to consider when allocating your assets are your age and future income needs. For example, single investors in their 20s will have a drastically different investment portfolio than someone in their 40s or 50s who plans on retiring soon and might be thinking about paying for a child’s college education with their retirement account.
Your personality also plays a role in your investment portfolio’s asset allocation. Would you rather accept the potential of losing money for a chance at higher returns, or does the thought of watching your investments take a short-term fall stress you out? This is known as your risk tolerance, and you’re the only one who can decide on the right for you.
Here’s one of many ways to allocate your assets: Subtract your age from 110 and use that number to determine how much of your investment portfolio you should allocate to stocks. For example, if you’re 25, you would consider allocating about 85% of your assets to stocks, while the other 15% of your investment portfolio would consist of other things, like bonds. As with all aspects of investing, only you can decide what the right asset allocation for you is—there’s no one-size-fits-all strategy.
After you’ve decided how you want to allocate your assets, it’s time to pick them and distribute your investment capital between various assets. When you’re building an investment portfolio or making any type of investment, diversification is important. Basically, don’t put all of your money into a single industry—spread it out over various stocks, bonds, funds, and markets. Here’s a quick rundown of the most popular assets to include in your investment portfolio:
Now that you've chosen an investment account and picked/allocated your assets, your investment portfolio is complete! So, what comes next?
Over time, your asset allocation might become unbalanced, and you'll have to make some changes. It's a good idea to analyze and rebalance your investment portfolio every 6–12 months or if one of your asset classes (stocks, bonds, etc.) shifts by a large percentage. For example, in Step 2, we said we'd allocate 85% of our assets to stocks, but what if we check in and see that it jumped to 90%? You can rebalance your investment portfolio by selling some of the stocks and investing that money back into other assets until your stock allocation goes back down to 85%.
Now that you know how to build an investment portfolio, it’s time to start investing in your future! However, remember that investing is risky by nature, and there’s no guarantee that your investments will be profitable.
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