Setting up an investment portfolio is often a daunting idea for those who aren’t familiar with the various components that go into a strong financial portfolio. However, it’s not as challenging as it seems, and a well-maintained investment portfolio can boost your investing success and set you up for long-term wealth growth. Choosing what to put in a portfolio is different for everyone and depends on each investor’s unique goals and risk tolerance. Here we explore the key factors you should consider when deciding what to include in your investment portfolio for maximum success.
What Is an Investment Portfolio?
An investment portfolio is a group of assets — such as stocks, bonds, and cash — that investors use to grow their wealth and reach their financial goals via investing. Investment portfolios can include a variety of investments that range from real estate to mutual funds to art. Each person’s investment portfolio will be different according to the investor’s unique financial goals and risk tolerance.
How to Decide on the Best Asset Allocation for Your Goals
There are several things you should consider when building your investment portfolio. The most important factors you should explore when deciding on the best asset allocation for your portfolio include:
- Your risk tolerance: A risk tolerance is essentially how much money you are willing to lose in an investment. Any investment comes with a certain degree of risk; however, some investments are much riskier than others. The riskiest investments are those that are aggressive, while conservative investments tend to have little risk. Understanding your tolerance for risk will allow you to determine which investments are appropriate for you.
- Your time horizon: A time horizon is the length of time you plan to keep your investment in your portfolio. For example, a retirement fund has a much longer time horizon than short-term stock investments. Having a clear time horizon is essential when determining what to include in your investment portfolio.
- Your future needs for capital: Many people begin investing with an end goal in mind. For example, maybe you’re starting an investment portfolio for both short-term and long-term goals, such as buying a home (short-term) and saving for retirement (long-term). If you need capital in the near future, you’ll want to invest more aggressively to see higher returns in a shorter amount of time. For long-term capital needs, you can invest more conservatively and allow your investments to grow over time.
- How much you can put toward your investments: How much money you’re able to allocate toward your investment portfolio will also play a role in the assets that will be most beneficial for you. The more money you can put toward your investments, the more assets you can invest in. If you only want to invest a small amount of money, you’ll need to find investment options that offer larger returns.
How to Choose Stocks
Your investment portfolio will likely not consist of only stocks. Diversifying your portfolio, or investing in several different types of assets, is important to protect against risk. When you do invest in stocks, you should ensure you’re investing in the right stock options for your goals. Here are a few things to keep in mind when choosing which stocks to include in your portfolio:
- Look for long-term stability: Many companies’ stocks will rise and fall at some point. This rising and falling is known as volatility and is a natural part of the stock market. When choosing stocks to invest in, look at a company’s long-term stability rather than how well they’ve done in the last few weeks to get a better idea of what you can expect in terms of the company’s growth and performance.
- Look at the debt-equity ratio: All organizations have debt, but when those debt levels are higher in relation to the company’s equity, this can be a negative sign of their success. Look for companies with a lower debt-equity ratio (0.3 or less is recommended for people with lower risk tolerance) to ensure your stock investments are profitable.
- Dividends: Some companies pay dividends to their stockholders. Dividends are regular payments (monthly, quarterly, or yearly) that go directly to those who own stock in the company. Organizations that offer dividends often have a higher degree of stability than those that don’t.
Other factors to consider when picking stocks to invest in include how the company is managed, the company’s price-earnings ratio, and its relative strength in the industry. A reputable wealth advisor will be able to steer you in the right direction of stocks worth your while that will help you reach your financial goals.
Invest in Roth IRA
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Roth IRAs are a great investment tool and are especially useful for long-term investing. Roth IRAs are individual retirement accounts (IRA) that allow investors to put a certain amount of contributions into the account over several years in order to save money for retirement. This type of IRA is funded with after-tax dollars, so the contributions are not considered tax-deductible. However, when you do withdraw money from the account, this money will then be tax-free.
Roth IRAs are fairly easy to open and simply require you to meet certain requirements. For example, in 2020, single individuals opening an account must make $139,000 or less and couples must make $206,000 per year or less in combined annual income. The maximum contribution you can make to your IRA each year is $6,000 until you are over the age of 50, when you can contribute up to $7,000 annually.
Why It’s Important to Pay Off Any Debts
Paying down your debt before beginning to make large investments is important to building a solid investment portfolio. If you currently have credit card or other debt, consider holding off on investing until this debt is paid off. Consider starting by paying down your highest-interest credit cards and working your way down until all of your debt is gone.
A solid investment portfolio is a great way to set yourself up for long-term success and profitability. Working with a reputable wealth management company like 3D Partners Wealth Advisors is a great way to ensure you’re making the right decisions when it comes to your money.