When it comes to investing, your list of options is as long as the sea is wide. It can be an overwhelming topic, and can cost you big time if you approach it haphazardly. But with a few tips and strategies, you can begin to build a solid portfolio that is viable, profitable, and built for long-term success.
Table of Contents
1. Create a Plan
Before you do anything, you need to set up a game plan for your portfolio. You’ll need to decide how much you want to invest, what your goals are, and, most importantly, how you feel about risk.
To work your plan, you need to be comfortable with it and not jump ship too soon. For example, if you like the idea of 15% annual returns but can’t abide the ride, you could be looking at huge losses. Know yourself, and make sure your portfolio matches or only slightly exceeds your comfort level.
2. Start Slow
Once you know how you want to invest, you may be ready to populate your portfolio. But take it slow by easing into investments.
Consider dollar cost-averaging to potentially mitigate losses. With dollar-cost averaging, you automatically contribute a set amount on a regular basis to specific investments in order to minimize the effect of a fluctuating market. Once your money is actually invested, you’ll get to see how you really feel about risk. When starting out, it’s best to take baby steps to make sure you’re comfortable with your plan. If not, adjust it accordingly.
If you’ll be managing your own portfolio, you must research. Go beyond listening to what the various financial pundits say, and don’t bank on analyst ratings or recommendations. If you’ll be investing in individual companies, check out their balance sheets and earnings statements. If you don’t know how to read those, do more research to find out.
If you’ll be primarily investing in mutual funds, look at the fund’s annual expenses, management’s track record, and the fund’s 5- and 10-year returns and how these compare to its benchmark index.
Also, make sure you understand the expenses associated with the investments you hold or that you’re considering. For example, mutual funds (including index funds) will charge an annual expense ratio that typically ranges from 0.5% up to 2% of the invested amount. This, obviously, can take quite a chunk out of your earnings, especially over many years. If you’re considering an investment with high expenses, make sure those expenses are warranted by performance or some other benefit.
A properly diversified portfolio can weather many storms and survive indefinitely. The philosophy of diversification is simply not to put all your eggs in one basket – and by following it, you can limit your losses.
Many people allocate their holdings between stocks, bonds, and cash. They will further diversify investments across different industries and geographic regions so that if one area suffers, the whole portfolio won’t be devastated.
How you balance between the different types of assets and diversify within those will depend on your goals, priorities, and your comfort with taking risk. For example, if you have 30 years until retirement, you’ll probably want to populate that portfolio with growth-oriented stocks and few bonds or cash. That said, in the spirit of diversification, you will want those stocks to represent a range of industries and both domestic and international companies.
5. Think Long-Term
When it comes to investing – especially for rookies – think long-term to start. If you have dreams of making millions day trading, that’s all well and good. But first, lay a solid, financial foundation with a long-term portfolio built to weather market fluctuations. Then, as you become more acclimated to being actively invested in the market, set aside a small portion of your funds to invest in short-term endeavors.
The most important thing to remember is that most investors fail by trying to time market downturns and upticks. They pull their funds out at exactly the wrong times and typically don’t do nearly as well as the long-term strategists who practice a buy-and-hold approach.
6. Regularly Review Your Portfolio
It’s a good idea to review your portfolio at least once a year. Rebalance your holdings if necessary, and make sure your investment choices remain in line with your goals and priorities.
Also, regularly review how your investments hold up to their benchmark index. If the same investments under-perform their benchmark year after year, you may want to consider moving into investments with a better track record.
Knowledge is power. If you’ll be managing your own portfolio, these are words to live by. You’ll want to know yourself, your comfort level, your priorities, and your goals. Build a portfolio that matches these and more than likely, you’ll enjoy the fruits of your labor.
But knowing yourself isn’t enough. Study the market, how it moves, what news it moves on, and its historical performance, as well as company news and fundamentals like balance sheets and earnings statements. Understand how tax advantaged accounts and investments differ from their taxable counterparts and how they might benefit you. If you never stop learning and make financial decisions based off a thorough understanding of the product and its benefits, you’ll build a portfolio to last beyond a lifetime.
What other tips can you think of for first time investors? Let us know in the comments!