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Portfolios

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Making an investment plan involves more than just choosing a few stocks to put money in. You have to consider your current financial situation and your goals for the future. It’s also important to define your timeline and how much risk you’re willing to take on in order to determine your optimal asset allocation. All of these steps help to mitigate any risk you might encounter in the stock market.

Step #1: Assess Your Current Financial Situation
The first step in making an investment plan for the future is to define your present financial situation. You need to figure out how much money you have to invest. You can do this by making a budget to evaluate your monthly disposable income after expenses and emergency savings. This will allow you to determine how much you can reasonably afford to invest.

It’s also important to consider how accessible, or liquid, you need your investments to be. If you might need to cash in on your investment quickly, you would want to invest in more liquid assets, like stocks, rather than in something like real estate.

Step #2: Define Financial Goals
The next step in making an investment plan is to define your financial goals. Why are you investing? What are you hoping to earn money for? This can be anything from buying a car in a few years to retiring comfortably many years down the road.

You must also define your goal timeline, or time horizon. How quickly do you want to make money from your investments? Do you want to see quick growth, or are you interested in seeing investment growth over time?

All of your goals can be summed up in three main categories: safety, income and growth. Safety is when you are looking to maintain your current level of wealth, income is when you want investments to provide active income to live off of and growth is when you want to build wealth over the long term. You can determine the best investment path for you based on which of these three categories your goals fall into.

The next step in crafting your investment plan is to decide how much risk you are willing to take. Generally speaking, the younger you are, the more risk you can take, since your portfolio has time to recover from any losses. If you are older, you should seek less risky investments and instead invest more money upfront to spur growth.

Additionally, riskier investments have the potential for significant returns – but also major losses. Taking a chance on an undervalued stock or piece of land could prove fruitful, or you could lose your investment. If you are looking to build wealth over years, you may want to choose a safer investment path.

Determining your time horizon is fairly simple compared to its risk counterpart. The term essentially means about when do you want to begin pulling from your investments for your ultimate financial goal. For the vast majority of Americans, time horizon is basically synonymous with retirement.

By figuring out your risk tolerance and time horizon, you can build a reliable asset allocation for yourself. This entails taking your investor profile, figuring out what you should invest in and what percentage of your overall portfolio each investment type should take up.

Step #4: Decide What to Invest In
The final step is to decide where to invest. There are many different accounts you can use for your investments. Your budget, goals and risk tolerance will help guide you towards the right types of investment for you. Consider securities like stocks, bonds and mutual funds, long-term options like 401(k) plans and IRAs, bank savings accounts or CDs, and 529 plans for education savings. You can even invest in real estate, art and other physical items.

Wherever you device to invest, make sure to diversify your portfolio. You don’t want to put all of your money into stocks and risk losing everything if the stock market crashes, for example. It’s best to allocate your assets to a few different investment types that fit in with your goals and risk tolerance in order to maximize your growth and stability.

Just like anything else in the realm of personal finance, becoming a good investor requires research and experience. If it’s your first time investing, the experience will come, so focus on soaking up information about the different types of investments that are available to you.

You should also take some time to consider all of the potential brokerages you could open an account with. In your comparisons, be sure to look through each firm’s trading fees, available investments, mobile and online features and more.

Investing Tips for Beginners
If you’re new to the investment game, don’t hesitate to ask for help from a professional. Financial advisors typically specialize in investing and financial planning, making them great partners for newbies.



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When creating an investment plan for your portfolio, diversification is the most important rule. Diversification essentially means spreading your assets among a variety of investments. Doing this helps to limit the risks and provides the potential to improve returns. A financial advisor could help you optimize an investment strategy for your financial needs and goals.


A diverse portfolio is one that’s made up of a mix of investments. Assets are allocated both among different types of investments, like stocks, bonds and mutual funds, and within those investment types, like large-cap and small-cap stocks in different sectors. Diverse portfolios reflect the investor’s goals and risk tolerance.



How to Diversify Your Portfolio

The first step in developing a diverse portfolio is defining your investment goals, risk tolerance, financial situation and timeline. Figure out how much money you have to invest. Also consider how much are you hoping to earn, how soon you want to see returns and how much risk are you willing to take on. The answers to these questions will help to determine your appropriate asset allocation.



Generally, stocks are more volatile than other types of investments, providing both a high potential for growth and a high risk of loss. Bonds or short-term investments are less risky, but their stability means slow growth.



Your timeline also factors into what investments are right for you. Because of the volatility of stocks, many experts recommend holding onto them for a long time, so your investments grow over time to mitigate losses. On the other hand, bonds and other stable investments tend to grow steadily and at a low rate, and may be better for short-term investments.



Once you figure out the best investments for your situation, you must decide how you want to spread your assets among them. An example would be 60% of your portfolio in stocks and 40% in bonds.



By diversifying your portfolio, you minimize the risk of your investments, as compared to putting all of your money into one asset. To build a diversified portfolio, you look for assets that haven’t historically moved in the same direction at the same time. That way, if one portion of your portfolio is in decline, the other portions are ideally growing or maintaining wealth.



A diverse portfolio’s goal is to keep your investments in balance, with gains mitigating any losses. Having a mix of investments helps to manage risk while still maintaining exposure to market growth.



Maintaining a diverse portfolio also helps you dodge the temptation of chasing well-performing investments in a market upturn and moving your money to lower-risk options in a downturn. Staying balanced within your portfolio’s diversification can lead to higher gains in the long run, as opposed to investing in the hot commodity of the moment.



Periodically, you should also reassess your investment plan. As you get older, you may want to move money into less risky investments to preserve your wealth. Or you may be reaching your goals ahead of schedule or not on pace to reach them at all, and thus need to adjust. Revisit the questions you considered when setting up your plan, and be sure to adjust your asset mix appropriately if your goals or financial situation have changed.


You must also make sure to manage your taxes on your investments. It may be best to work with a financial advisor or other financial professional who can advise you on the most tax-efficient ways to manage your portfolio and minimize losses.
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