How to Manage Your Investment Portfolio

Strong returns on investment do not happen overnight or by accident.

 

To make the most of their investments, investors need to consistently employ strong strategies aligned with their short- and long-term goals and values. They also need to carefully invest in the right types of financial tools.

Not all investors will be equipped or interested in researching and handling the many details associated with these requirements in person. Some investors decide that the best strategy for them is to put their money in the hands of a professional. While this is perfectly acceptable, it does not completely relieve investors of decision-making when it comes to directing the growth of their investments.

Whether they manage their investments personally or hire assistance, investors can set themselves and their investments on the path to success by taking the time to periodically review their needs, goals and financial position and adjusting their investments and strategies accordingly.

Determine Your Goals and Tolerances

The first step in portfolio management for all investors is determining their goals and tolerances. Goals may be as short-term as the next year or as long-term as planning for a retirement that is decades away. Investors may select both short- and long-term goals if they wish. The time aspect of goal setting is particularly important. The length of time an investor has to achieve their goals directly impacts the level of risk they will need to take and the types of securities they will need to invest in. Longer-term goals typically afford investors more options than shorter-term ones.

How investors define their goals matters. Investors may set a total target dollar value for retirement or may decide they want to achieve a specific percentage of return on investment annually. Like the time limit, how the goal is defined can influence which types of securities an investor buys.

In addition to goals, investors must consider their tolerances and values. An investor’s tolerance for risk is crucially important to his or her investment strategy. Some investors cannot financially or emotionally handle any significant investment losses. In that case, their investment portfolios will need to be heavily weighted toward low-risk investments like Treasury bonds. Other investors have a higher risk tolerance and may be able to take advantage of high-risk, high-yield stocks.

Although some investors find the suggestion odd, it is equally important that investors consider their larger personal values when making decisions about their investment portfolios. Some investors find tremendous personal satisfaction and reward in investing in socially or environmentally responsible companies. Others strongly believe in not investing in companies that produce addictive products or which engage in irresponsible marketing practices. Investors often also find that reflection on their values and priorities helps them make informed decisions about how much they need to save to achieve their desired goals or to be able to live their preferred lifestyle at retirement.

Decide If You Need Help

Investors who are unable to personally build their portfolios or who are simply disinterested in doing so should select a strategy that puts a professional in charge of growing their assets. Mutual funds, exchange-traded funds and index funds are all examples of easy, productive and often inexpensive ways of setting up a positive, hands-off investment strategy.

Investors who feel they have the time and interest to manage their investments on their own should begin with research. They should make full use of the tools, information and resources available to them in selecting stocks, bonds and other securities from which to build their portfolios. Financial professionals strongly encourage do-it-yourself investors to consult automated investment services (also sometimes referred to “robo-advisors”) for assistance in verifying the appropriateness of their choices.

Research

Financial professionals universally agree that investors managing their own portfolios must make a point of educating themselves about investing, markets and securities if they are to achieve success. They can do this independently or take a pre-packaged course offered by investment, financial or educational institutions. Many such courses are available for relatively low prices and delivered entirely online. These self-paced learning opportunities can be a cost-effective way for new investors to get their feet under them and learn the ropes of investing.

Investors managing their own portfolios should also expect to do regular market research. This ongoing awareness of the state of the market, emerging players and changes in existing assets is essential to making good choices.

Diversify and Balance Over Time

Diversifying is a critical component of building a strong portfolio. By intentionally investing across different types of securities, different industries and a variety of geographic regions, investors can reduce their potential losses in the event of a market downturn, natural disaster or economic upheaval.

 

Investors who buy into mutual funds, ETFs or index funds automatically have a certain level of diversification. However, it is only a start. Many investors will want to further balance their portfolios with real estate, bonds and other securities to maximize their potential gains and limit their overall risks to within their tolerances. Investors who have not bought into those types of funds must build diversity from the ground up over time using similar strategies.

Additionally, investors may find that it is in their best interests to modify the types of securities they are using as their investments and financial situations develop and mature. Financial advisors suggest that investors looking for short-term investments of three years or less focus on money market accounts. They offer a low rate of return but are highly liquid and FDIC insured against loss.

Investors selecting securities for investments of between three and 10 years will want to consider CDs or index or ETF funds. Which of these options is best for an individual investor will depend on his or her need for liquidity and risk tolerance. Investors choosing securities for long-term growth have the most options. They may also choose index funds or ETFs. They might also elect to use bonds, real estate and other time-dependent tools.

Over time, investors may shift the balance of their portfolios from higher-risk, higher-yield assets to lower-risk, lower-yield assets as they approach retirement. They may transfer from a low-cost index fund to a slightly higher-cost mutual fund as their assets grow and they can better afford the charges that accompany the benefits and returns of a managed fund.

Stick to the Plan

Perhaps the most difficult aspect of managing an investment portfolio is having the discipline and fortitude to remain dedicated to an investment plan in the face of unexpected financial losses. Historically, stocks, bonds and other investments always recover over time. Investors who ride out turbulent periods of the market by remaining true to their established strategies and reinvesting where necessary will recover and will almost certainly reach their long-term goals. Investors who react to losses by pulling their remaining assets out of the markets suffer irreversible income losses.

 

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