How Do I Construct an Investment Portfolio That’s Right for Me?

What Is an Investment Portfolio?

Simply put, an investment portfolio is a grouping of assets that you invest in with the goal of achieving a return. Note that an investment portfolio isn't a physical portfolio because investing is done digitally now. When looking at all your investments, it's beneficial to view them as part of a larger picture. The assets that you invest in your investment portfolio could include:

• Stocks - equity that represents small ownership of a public company
• Bonds - a loan from an investor to fund operations of a company
  Commodities – funds going into raw materials, agricultural products, precious metals, and energy resources
• Cash and cash equivalents – money from banks and securities that can be converted to cash immediately
• Mutual funds - money brought together by multiple people to invest in assets
  Closed-end funds – a type of mutual fund that has a set number of shares from an initial public offering (IPO) to raise capital for an initial investment
• Exchanged traded funds (EFTs) - a basket or grouping of investments

Risk Tolerance

There’s an inherent risk involved whenever you’re investing money. You hope to have a return on your investment, but there’s always a chance that you get no return and lose your investment. Your risk tolerance refers to just how much of a risk you’re willing to take and what level of loss you can absorb. There are three levels of risk tolerance when investing:

1. Aggressive

An aggressive risk investor is well versed in the world of investing and is able — and willing — to take a big loss. This type of investor is used to seeing extreme fluctuations within their portfolio and tends to be wealthy, experienced, and have a broad and diverse investments. To this type of investor, it’s high risk, high reward.

2. Moderate

A moderate-risk investor is less aggressive. They will take some risks but typically set boundaries within a percentage of what they’re comfortable losing. Their moderate approach to investments yields fewer rewards when the market does well, but also doesn’t suffer an extreme loss when it doesn’t.

3. Conservative

A conservative risk investor takes the least amount of risk with their investments. Whereas the other types of investors are prioritizing gains, a conservative investor is prioritizing avoiding any losses. Their aim is to protect their assets above all else.

There’s a difference between risk tolerance and risk capacity in investing as well, and it’s important to determine both before you begin building an investment portfolio. Your risk tolerance is your emotional and psychological willingness to take a risk and your risk capacity is your financial ability to take the risk without jeopardizing your financial standing. Your tolerance and capacity are not going to necessarily be the same thing, and that’s completely normal.

What is a Diversified Investment Portfolio?

Once you start investing, you’ll hear a lot about having a diversified investment portfolio, but what does that mean? A diversified portfolio is one that is built from assets that complement each other and don’t necessarily perform the same way. The goal with this approach is to lower your risk; if one asset is performing well, but another is doing poorly, they counterbalance each other. To build diversified investment portfolios, investors have historically worked to strike a balance of roughly 40% stocks and 60% bonds. Bonds are lower-risk investments than stocks and protect your assets should your stocks suddenly plummet.

Building the best investment portfolio for yourself includes working with a qualified and knowledgeable advisor, determining your risk tolerance, and diversifying your investments. If you’re ready to start building for your future, we’d love to work with you.