Portfolio construction is the art and science of building a custom investment portfolio that meets your unique needs and goals. It’s a process that involves carefully selecting and combining different asset classes, such as stocks, bonds, and cash, in a way that optimizes your risk-return profile.
Key steps in portfolio construction:
- Define your investment objectives. What are you saving for? Retirement? A down payment on a house? Your child’s education? Once you know your goals, you can start to think about the types of investments that are most likely to help you achieve them.
- Assess your risk tolerance. How much risk are you comfortable taking on? Are you willing to lose some money in order to potentially earn higher returns? Your risk tolerance will play a big role in determining your asset allocation.
- Determine your asset allocation. This is the percentage of your portfolio that you’ll invest in each asset class. A typical asset allocation for a long-term investor might look something like this: 60% stocks, 30% bonds, and 10% cash. However, your asset allocation will vary depending on your individual circumstances and goals.
- Select your investments. Once you know your asset allocation, you can start to choose specific investments. There are many different types of investments available, so it’s important to do your research and choose investments that are appropriate for your risk tolerance and time horizon.
- Manage your risk. No investment is completely risk-free. However, there are a number of things you can do to manage your risk, such as diversifying your portfolio and using stop-loss orders.
- Monitor and rebalance your portfolio. It’s important to regularly monitor your portfolio and rebalance it as needed. This means adjusting your asset allocation to ensure that it still aligns with your investment objectives and risk tolerance.
- Review and adjust your portfolio periodically. Your investment needs and goals may change over time, so it’s important to review your portfolio periodically and make adjustments as needed.
