Building Your Investment Portfolio
While Wall Street teaches rigorous portfolio management techniques, many individual investors don't have formal training in this area. If you're feeling unsure about how to properly construct your investment portfolio, you're not alone.
Here are some practical tips that can help:
Assess Operational Risks
One important factor to consider is operational risk - the potential for losses due to inadequate systems, processes or external events. For example, if you own rental properties, think about the time and hassle involved with managing units in different locations. A property three hours away may present more operational headaches than one 20 minutes from your home. Minimizing operational risks can provide peace of mind.
Diversify Across Asset Classes
Don't put all your eggs in one basket. By spreading your investments across different asset classes like stocks, bonds, real estate and cash, you can mitigate overall portfolio risk. The classic 60/40 portfolio weights equities and fixed income, though your specific mix should align with your risk tolerance and time horizon.
Avoid Overlapping Investments
Take a look under the hood of your mutual funds and ETFs to understand the underlying holdings. You may inadvertently have overlap across multiple funds, concentrating your portfolio in particular sectors or companies. Use tools to analyze your positions and eliminate unintended redundancies.
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Rebalance Periodically
Over time, different segments of your portfolio will grow at different rates, disrupting your intended asset allocation. Reviewing and rebalancing periodically (e.g. annually) can restore your desired risk profile and prevent any single area from ballooning.
Let Your Intuition Guide You
At the end of the day, portfolio construction is part science, part art. While quantitative analysis is invaluable, also pay attention to your gut instincts about potential risks or areas of overexposure. Just be sure your decision-making process is logical and data-driven.
Building an optimal portfolio is challenging without formal training. But taking a structured approach to assessing operational risks, diversifying, avoiding overlaps, rebalancing, and trusting your intuition can point you in the right direction.