What Makes Up an Investment Portfolio?
The good news is that you do not need to pay a professional broker to make up an investment portfolio -- you can do this yourself. Your goal is to compile a diversified portfolio. The key to accomplishing this is in determining which asset classes to include and their respective percentages, diversifying your holdings, periodically re-balancing your portfolio, and consistently funding your portfolio over your employment career. The effects of compounding interest really becomes evident over a period of 20-to-30 years.
The asset classes you should include in a typical portfolio include, at a minimum, stocks and bonds. If you only have mutual funds to choose from, then select stock and bond funds. A good rule of thumb, suggests the website Bankrate.com, is holding a percentage of bonds in your portfolio that equals your age, so the remaining portion of your portfolio should be in diversified stock or another similar asset class. Having a certain percentage of cash on hand is also a good idea to cover emergencies.
After you have determined your asset classes of stocks and bonds, you should diversify them into different classes. As the saying goes, you never want to put all your eggs in one basket. The website CNN Money advises investors to have a mixture of stocks and bonds, including some exposure to foreign stocks. Alternatively, an equivalent and more simple strategy is just to have stock and bond index funds. In theory, an Index fund mirrors the respective market returns it represents.
Maintaining oversight of the returns of your portfolio is critical. You should check its performance at least each quarter. Avoid trying to predict asset movements but instead re-balance your total percentage of stocks and bonds in your portfolio. The "Wall Street Journal" suggests re-balancing once a year to keep your mix on target with your investment strategy.
It is also very important that you fund your investment portfolio consistently with a future goal in mind. Equally important is that you do not cash out prematurely from your investment portfolio before reaching your goal. Don't believe the myth that if you do, you will make up for it in the future. This rarely happens because life events just get in the way. You can reward yourself with your investment goal by simply adjusting your standard of living.