4 steps to creating a portfolio
Putting together a portfolio of investments is like building a home. Even if a house is filled with beautiful rooms that may not be enough: All those rooms need to work together to form a pleasing and useful whole. Investment portfolios work the same way.
Here we show you how to design a successful portfolio of mutual fund investments that work together to help you reach your goals.
1) Have a blueprint
Just as building a home begins with a blueprint, you need a pattern for your portfolio. The blueprint tells the builder to build a structure of a particular size and shape, with specific features, to suit the needs of its future owners. Similarly, your portfolio should suit your needs and specifications.
The best starting point is to think about why you're investing in the first place. Maybe you're investing for retirement, for your child's education or marriage, or for the down payment of a home. Get specific. How much money will you need for each goal? How much time do you have?
Whatever your goal, it gives you vital information. When you figure out how long you'll be investing (your time horizon), you can come to terms with how much of your investment can be put at risk. The closer your goal, the less you can afford to lose, so the focus should be more on preserving what you've made rather than on generating additional gains. The more time on your side, the more should be the tilt towards equity.
2) Decide on an asset allocation.
The heavy lifting of any mutual fund investment plan starts well before individual investment selection. In other words, sensible portfolio construction must commence with asset allocation. Some financial experts believe that determining your asset allocation is the most important decision that you'll make with respect to your investments - that it is even more important than the individual investments you buy.
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