Are you thinking of building a stable portfolio across various asset classes? The asset classes could be financial asset classes such as stocks and bonds and non-financial or tangible asset classes such as real estate or gold.
The following tips would help you to start building a solid portfolio over a period of time:
1. Start early
Do you remember the famous saying “The early bird catches the worm”. The same is truer when you start constructing an investment portfolio.
If you invest $100 in a bank deposit carrying 7% interest per annum, at the end of 5th, 10th, 15th and 20th year, this amount would respectively grow to $140, $197, $276 and $387. Notice that during the first 5 years, your investment would grow only by $40 while during the last 5 years the investment would have grown by $111. Thus you have to work much less during later part of your career if you have started early.
2. Invest regularly
Even if you don’t have a lump sum readily available for investment, you can use even your limited surplus to invest on a regular basis. Investment strategies such as Dollar Cost of Averaging and Value Cost Averaging can bring down the average cost of investment.
These strategies have known to harness the power of compounding to deliver superior results over a period of time.
3. Spread your investments
Again remember the famous adage: “Don’t put all your eggs in one basket”.
In investment parlance, it is popularly called asset allocation. If you invest all your money in one asset class say real estate or stocks, sudden fall in that particular asset class might wipe out your hard-earned savings in a jiffy. Hence by judiciously spreading your investments across various asset classes in appropriate proportion based on your risk profile, you can comfortably enjoy your journey towards building a solid investment portfolio.
4. Have realistic expectations
Building an investment portfolio is a lifelong process. During this process, you might realize that events beyond your control such as inflation, changes in interest rates or stock markets would affect your accumulated investment.
Hence if you want to build a stable investment portfolio, your return expectations from various asset classes should be realistic. For instance, during the recent past, Gold has provided extraordinary return. You should not base your future investment decision keeping only this sudden aberration in the price movement.
5. Rebalance your investments
When you spread your investments across various asset classes, it would be common to see some of the asset classes such as real estate or equity investments would have provided super-normal return during a particular year(s). Hence you should ideally review your investment portfolio at least once a year and rebalance the portfolio by shifting money from high-return asset class to the lower-return asset class.
This would automatically help you maintain your asset allocation consistently year after year.
By adopting the above simple techniques, you can easily start building a robust portfolio that can help achieve your future goals.
Allan has been blogging about investment for the last 3 years and reviewed numerous financial products at Ubank. Allan holds a BA in Business Administration with a speciality in banking and finance.