Before you start to invest, it is important to decide how you want to build your portfolio.
For instance, you should determine for yourself what asset classes you want invest in, and how much you would like to allocate for each class. Having an idea can help you make the correct decisions to achieve your desired portfolio. With that said, here are three questions to ask yourself when building your portfolio.
What are your investment objectives?
Investors should also know what their investment objectives are. It is not as simple as saying I want to make as much money as possible. Every investor hopes for good returns but at what price? For instance, a retiree may want to build a portfolio that provides stable and consistent cash flow that can meet his or her daily expenditures, while limiting downside risks. A conservative portfolio that consists of income stocks and bonds will be more appropriate for the above retiree.
On the other hand, a young investor may want to grow his wealth for retirement. He or she does not need consistent cash flows from his investments. In this case, the young investor will probably want to allocate more of his investments into growth stocks that do not pay out a dividend but have the propensity for higher capital appreciation.
What is your risk tolerance?
A risk averse person will likely be more comfortable putting less money in highly volatile assets like stocks and more in stable assets like government bonds and treasury bills. On the other hand, someone who is comfortable taking a bit more risk in the hope for higher returns, might want to allocate more into higher return assets like stocks and less to bonds.
You can take this free online risk tolerance questionnaire to assess how much risk you are likely to be willing to take.
Do you want to manage your own portfolio?
Once you have identified your investment objectives and risk tolerance, you can then decide how much of your portfolio you wish to put in each asset class.
For instance, I am a relatively young investor who has a higher tolerance for risk. Therefore, I have decided to put a higher proportion of my investments into stocks. I have also decided that to grow my portfolio faster, I will put around 60% of my stock portfolio into growth stocks to achieve greater returns.
But there are different ways to achieve this desired portfolio weighting. I can invest directly into shares or invest in investment vehicles such as ETFs or unit trusts that give me the desired exposure. If you are willing to take the time to learn and invest in stocks, I encourage managing your own portfolio as you do not have to pay a management fee.
On the other hand, if you have less time on their hands or are not interested in learning how to pick stocks, you can invest in unit trusts or ETFs that help you manage the portfolio. All you need to do is find out what percentage of your portfolio should be put into stocks, bonds, real estate etc. and find the correct investment vehicles that give you the necessary exposure.
The Foolish bottom line
There are multiple factors to consider when building your investment portfolio. We should consider each carefully so that we can have a portfolio that satisfies our goals and is in line with our risk profile. By answering these three simple questions for yourself, you have taken the first steps to building your very own investment portfolio.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Jeremy Chia doesn't owns shares in any companies mentioned.