Building an Investment Portfolio
A child’s college education, retirement, death — no way around it, the time will come when one, or more, of these eventualities will cost you. And while each may lie somewhere in the distant future, fiscal prudence dictates you should begin planning for them today.
That’s where the investment portfolio comes in.
Though the term “investment portfolio” may sound like something discussed between the blue bloods at the country club, truth is, any working stiff with a little extra cash in pocket can begin investing in his, or her, financial future. Creating a portfolio is the bedrock of any financial plan designed to increase wealth and create a secure financial future for you and your loved ones.
You don’t have to hold a degree in financial planning to cobble together an investment portfolio of stocks, bonds, insurance, mutual funds and other money programs of that ilk — but it sure wouldn’t hurt. Whether you do-it-yourself or hire a professional to walk you through the financial maze, you’ll find the following three questions, when answered, can get you started and pointed in the right direction.
- What are your financial goals?
- How much risk are you willing to take?
- What is your time horizon?
Goals:
Want to build a sloop and sail it around the world? Perhaps you’re determined to send all the children and grandchildren to Harvard? Or maybe you’d just like to spend your retirement worry free, swinging in a back porch hammock. Whatever your vision of the future might be, defining a goal is the best place to start before deciding how to get there.
Risk:
With investment comes risk. The question is, how much risk are you willing to take — how much can you afford? While the greatest risk can produce the greatest reward, it’s also true that high-risk investment can wipe out a savings account. This is one area where doing your homework (or having a professional do it for you) can really help avoid financial land mines.
Time Horizon:
What exactly is a time horizon? Simply put, this is the time frame from the moment you kick- start your financial plan until the day it pays off and the goal is reached. Time horizon is a matter of personal preference reflected in the choices made while constructing an investment portfolio. For example, if your retirement party isn’t planned for anytime soon, then your portfolio might weigh heavier toward stocks (long range investors need not be overly concerned with a jittery stock market the way short-termers might). Conversely, if your time horizon is short, a more conservative approach might be in order, perhaps by adding less volatile investments such as bonds. But as always, consult a professional before making these decisions.
Next Steps:
Once goals, risk and time horizon are established, the next step is drawing up a financial plan and executing it. In all cases, the plan’s objective should reflect the investor’s comfort level and financial need as it relates to income, growth potential and risk. Some financial planners think of “investment priorities” when developing portfolios for their clients. For instance, while one client may consider capital a main priority, another may opt for income — while a third may prefer a balance of both growth and income.
Portfolios usually include a variety of investment strategies to help insure a financial safety net for the investor. By diversifying a portfolio — such as mixing bonds, mutual funds, insurances and individual stocks — losses in one area can be offset against gains in another. It’s also prudent for investors to conduct an occasional portfolio review, making certain their strategies are building wealth and on track for their ultimate financial goal. Life can play havoc with the best-laid plan (as can the stock market) and it may become necessary, at some point, to rebalance the portfolio.
Finally, here are a few tips from some financial planning experts that impact the three priority goals common to most investors.
Retirement:
Rolling over your employee retirement plan assets to a 401(k) IRA enables a more diversified portfolio and greater flexibility than most employer sponsored plans. For instance, if younger than 59 ½ , you can withdraw funds from an IRA without penalty through “substantially equal periodic payments.”
Education:
With the average cost of a four-year private college education nearing the $100,000 mark, many parents are concerned that paying their child’s tuition bill could cost them the family home. The 529 College Savings Plan has been designed with the nervous parent in mind. The 529 is state sponsored and allows contributions by anyone to a tax-free education account. Similarly, the Coverdell Education Savings Account allows $2,000 per year in tax-exempt contributions, which can be tapped for qualified expenses after the beneficiary’s eighteenth birthday.
Estate Planning:
A strategy insuring one’s heirs are financially secure with a minimum of tax intrusion is central to many investment portfolios. Trusts, charitable giving and the use of insurance plans are critical in this regard. Life insurance, in particular, can prove an invaluable asset for paying off debt and estate taxes. And, for heirs in need of ready cash, they can always tap into their insurance fund.