A well-diversified investment portfolio contains a broad mix of both equity and debt securities. Your investments might include common stocks of large, medium and small cap companies, taxable and tax-exempt bonds, and a percentage of your assets should be in cash or cash equivalents, such as U.S. Treasury bills and bank certificates of deposit. How your assets are allocated between these categories depends on a number of factors including your age, your investment objectives and your tolerance for risk.
Determine your current financial condition. The most important factor is typically your age. Since younger people have more time before they reach retirement, they can afford to be more aggressive with their investments. Older people might prefer to take a more conservative stance with their money, since they don't have time to make up a loss from an investment misstep. Other factors that influence the percentage of bonds and other assets in your portfolio include the type and value of your current assets, your income, the income you will need after you retire, your current tax rate and your projected post-retirement tax rate, how much you can save and invest each year, and how comfortable you are with taking risks.Step 2
Develop an asset allocation plan and begin to implement it. Every investor's needs are different, but your assessment of your financial situation will likely put you into one of three categories, according to the American Association of Individual Investors. If you have at least 30 years before you will reach retirement age, you are probably in the aggressive investor category. Ninety percent of your investment portfolio should be in equity investments and only around 10 percent should be in intermediate-term bonds. As you age, your investment portfolio should typically reflect a growing conservative trend. If you have at least 20 years to retirement, your intermediate bond holdings should increase to around 30 percent of your portfolio. By the time you get within 10 years of retirement, intermediate-term and short-term bonds should make up approximately 50 percent of your portfolio.Step 3
Stay actively aware of your investment portfolio and re-balance your assets to bring them back into proper ratios as needed. The market is constantly in flux, and the percentages of the holdings in your portfolio will shift based on how each investment performs. Your bond investments might decrease significantly in value if interest rates rise, while the value of your stock holdings might increase. You might need to sell off some securities and buy others to bring your portfolio back into proper balance. How frequently you re-balance your portfolio is a personal choice, but the U.S. Securities and Exchange Commission notes that financial professionals recommend revisiting your portfolio every six to 12 months.
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.