How to Choose the Best Investments for Your Portfolio

0
290

 

“What counts for most people in investing is not how much they know, but rather how realistically they define what they don’t know.” ~ Warren Buffett

If you begin counting people who made it big in the realm of investing, you’ll probably stop before reaching ten. Why? Because very few people know and have the patience to make their mark in the investment industry.

Lucky for you, you don’t need to generate market-breaking returns to achieve your financial goals. What you do require is a fundamental understanding of how different assets classes work and the ability to identify the right assets to reach your financial goals. We’re going to discuss a simple, thorough process that will help you choose among different financial instruments.

Identify your financial goals, risk appetite, and liquidity requirements

The first thing you need to do is to analyze your financial profile. Start with the basic questions, such as your financial goals, risk appetite, and money requirements, along with specific or at least tentative dates associated with these goals. These questions will make the foundation of your investment strategy.

Finding out your financial goals

  • Start by naming your goals. It could be your career, study, travel, children, buying your first home, and retirement. In case of multiple ones, prioritize your goals, and attach a rough dollar amount and time by when you need the money.
  • Is there a specific time when you need this money? For instance, you will need funds for retirement at 65 or afterward. Similarly, you will require money for your house or studies at particular time intervals, so specify it. This exercise will also help you divide your goals into long-term, medium-term, and short-term goals.
  • Take into account the effective tax rate when specifying the amount you need for individual goals.

Finding out your financial risk

  • Would you worry if your investment portfolio goes down for a short period, such as six months?
  • How likely are you to pull out the invested money during this short period of market fluctuation?
  • What is your ideal investment period?

Finding out your money requirements

  • Do you or your spouse have a health issue that might affect your income in the future?
  • Do you expect any additional financial requirements, such as paying for elderly care, child support, or helping children financially after college? You will require extra money for these commitments.

How long can you stay invested?

Since your investment period will vary in accordance with your financial goals, you should prepare an investment time slab. For instance, if you’re saving for retirement, you probably have another 25 years or more to invest, which provides room for higher risk tolerance. Nationwide data report indicates that the average American starts saving for retirement at age 31, thereby having an investment period of more than 30 years. On the contrary, if you’re saving money for the downpayment of your house, you have a reasonably low investment period, so there is little room for risk. The same rule applies to each of your financial goals, so be careful when creating this time slab.

Investing yourself or through a financial advisor

Are you going to invest yourself or choose a financial advisor to manage your investments? If you’re anything like your fellow Americans, you will choose the earlier. Invest in You Savings Survey from CNBC and Acorns finds that nearly 75% of Americans manage their finances, and only 17% take assistance from financial advisors. When taking this decision, make sure to define your understanding of different assets accurately, ability to keep emotions out of your investment decisions, and having the skills to diversify your investments to reduce your risk exposure. Most of the people often overestimate their financial prowess, falling short of their money targets down the line.

Choosing an investment strategy

What is your investment strategy? Do you prefer value investing or growth investing? If you do not have answers to these questions, hiring a financial advisor would be a better choice. The investment strategy varies from one individual to another, and one must choose a plan that aligns with his financial goals. Some common types of investing strategies are:

  • Value Investing
  • Growth Investing
  • Income Investing
  • Small-Cap Investing
  • Socially Responsible Investing

Create an investment plan

By now, you understand your financial goals, risk appetite, investment period, and you also have an investment strategy, so it’s time to create an investment plan. We insist on creating a written investment plan that clearly specifies your goals, assets you choose to achieve these goals, investment period or distribution time, and expenses or fees associated with different asset classes. Schwab’s 2018 Modern Wealth Index survey indicates that people with a written investment plan perform better in terms of achieving their financial goals against those lacking written plans.

It is imperative to understand that different asset classes have different growth potentials, risks, and payout periods, so you should be very tactical when allocating funds to individual assets. Some common assets classes are stocks, bonds, cash, derivatives, real estate, private equity, foreign currency, commodities, and insurance products.

Diversification is critical

Everyone is aware of the ‘higher the risk, greater the reward’ analogy in the investment strategy, but it applies differently to institutional investors or professional fund managers and individual investors. Unlike professional money managers, you’ll be the one bearing the price of higher risks, so it is critical to diversify your investments. A survey indicates that only 34% of Americans actively know whether their money is diversified or not. Some of the most preferred methods to achieve diversification include investing in ETFs (exchange-traded funds), index funds, or mutual funds. Always make sure that your investments are diversified enough to bring down your risk exposure and maintain a balance between fixed-income and market-driven assets.

Track and review periodically

Last but not least, tracking your investment portfolio is a must for do-it-yourself investors. We don’t suggest tracking investments on a daily or weekly basis, but a thorough quarterly or semi-annual review should do the trick for you. There are multiple portfolio applications that you can use for tracking your portfolio. If your returns seem to be below-average over an extended period, you should consult a financial expert or make the changes yourself to stay on course for your financial goals.

Creating an ideal investment portfolio that aligns with your financial goals is a time-consuming, research-intensive process, with a huge impact on your financial wellness. We advise you to practice extreme caution and do comprehensive research when making these critical money decisions. Always consult a financial expert if you are unsure or unable to achieve the desired results.

Good luck with your investing, and do tell us your investment plans in the comments section.