Investing in different assets is one of the best ways to improve your long-term financial stability. It allows you to build equity over time and diversify your investment portfolio for the best return. However, when it comes to building a portfolio, many people aren’t sure where to start or how to view individual assets under one cohesive system. To help you get the most out of your efforts, here’s how to create an investment portfolio for the long run.

1. Set an Investment Budget

Since many investment portfolios require long-term commitments, you need to make sure that you won’t need to access the money immediately. This is where investment planning comes in. You should have enough money in bank accounts to pay rent or mortgage, bills, medical expenses, and any other essential products or services, so take the time to meticulously track your spending for a few months. From here, see how much money you can realistically invest as a whole so you can create clear investment portfolio objectives. If you’re not sure what you can afford, consider hiring a financial advisor to help manage your money.

2. Consider Your Risk Tolerance

Where you're at in your life will impact how you decide to invest. The earlier you take action, the better the long-term yield will be. Your overall risk tolerance will make a substantial difference in the types of investments you decide to contribute. They also have a direct impact on the variable levels of return. You’ll need to find a good balance between the two—one that you’re comfortable making. Protecting your portfolio is essential for a good long-term strategy.

3. Choose Your Investment Accounts

If applicable, one of the first investment accounts you should contribute to is your 401(k). Since many companies provide matching contributions, this immediately increases your return on investment. Over time, these funds will grow tax-deferred and can eventually equate to millions of dollars earned. Even if you’re struggling with money, reevaluate your budget and try to find some room to contribute to your 401(k). However, if your company does not match your contributions, prioritize other investment accounts first. Consider opening a traditional IRA or a Roth IRA for higher yield savings. Homeownership is a great way to diversify your long-term investments and take advantage of differing tax incentives. This has the biggest impact on first-time homebuyers but is still beneficial for those who are on their second or third property. Make sure that you understand which areas of real estate are profitable and which should be avoided. Stocks are another option commonly used to diversify an investment portfolio. Since stocks are technically small portions of ownership of a company, their success depends directly on whether the company is doing well or poorly. To help reduce the long-term risk associated with stocks, investing using index funds, exchange-traded funds (ETF), or mutual funds is a good alternative. An index fund is a type of portfolio made up of a combination of different stocks and bonds in the marketplace. They’re less dependent on the real-time state of the market and are often coupled with low operating expenses and turnover rates. An ETF is considered a type of security that can be purchased or sold on a stock exchange. This is similar to stock market trading, but they have the ability to be more individually structured for different strategies. ETFs can be actively traded throughout the day. Mutual funds also make up a combination of stocks, bonds, and assets to create a portfolio of investments that work in a collaborative effort with other investors. The three are fairly similar, which is why working with a professional will allow you to make more informed and targeted decisions. For further diversification, you can invest in bonds. Bonds are considered loans to companies that are slowly paid back over time with interest. You can also invest in government bonds. Bonds carry less risk than traditional stocks, but that also means less return. Buying bonds for longer periods of time have the potential to create higher returns on investment, but again it depends on a few factors. If you want to have a more hands-on approach to your investment portfolio, which would include reading books and articles on current financial situations, analyzing your returns, and adjusting your portfolio, you may be more interested in ETFs, mutual funds, and individual stocks. Hands-off investors will prefer more pre-determined asset allocations or portfolios managed by a professional financial advisor.

4. Determine Asset Classes Allocation

Once you determine which investment accounts you’re going to utilize, it’s time to determine asset allocation between them. This is where you’ll decide how much of your investment budget to allocate to each asset class. How you split up your portfolio again depends on your individual circumstances and risk assessment. More conservative investors will have a far different allocation than those who are aggressive. If you’re unsure about how you should approach the allocation for asset classes, consider your age, financial situation, and your overall goals. You can also work with a financial advisor to better understand the best course of action for your individual circumstances.

5. Analyze and Rebalance

After building your investment portfolio, you’ll need to wait and watch the trends of your accounts. It’s not uncommon for things to go awry at first, which is why it’s important to analyze and rebalance as needed. This can help to restore your portfolio and keep your goals on track for success. However, for the best results, don’t rebalance until at least six months—12 months if possible—unless your classes shift by a large percentage. Your allocation may also change if you decide to change your type of portfolio from conservative to moderate or aggressive or vice versa. Learn more: Can you have a Roth-IRA and a 401k? 

Working with a financial advisor gives you the expertise you need when creating a long-term investment portfolio that is tailored to your personal risk tolerance. To schedule a consultation with an experienced financial advisor, contact me, William Bevins today at [email protected] or by calling (615) 469-7348.