You don’t need to be the Warren Buffett of your generation to build a successful investment portfolio. All you need is some patience, a few clever strategies, and a bit of capital to get you started.
Read on for our top three investment strategies to create the portfolio of your dreams.
#1 Know Thyself
Just like fingerprints or snowflakes, no two investors are quite the same. Whether you invest in a reliable stock for long-term rewards or snag risky ones for the chance of high returns depends completely on your personality and financial goals.
To truly curate the ideal portfolio for you, you need to understand what type of investor you are. Knowing yourself in this way will help inform your asset allocation strategy, which is fundamental to building your portfolio.
Here’s what you have to consider:
- Time – The time you have to accumulate returns on your investments will determine the risks you take. If you’re middle-aged and only jumping into the investment game now, you may want to throw a higher-risk, higher-return stock in the mix to make up for lost time, but keep your overall portfolio fairly conservative. Conversely, if you’re fresh out of college, you’ll have a ton of time to let your nest egg grow so you can have a higher risk portfolio to start with
- Starting Amount – The initial amount you can invest will also sway your asset allocation strategy. If you invest a large sum, you’ll want to be more cautious with your portfolio to avoid potentially devastating losses. However, if you’re only investing the amount you’re comfortable losing, you can afford to take a risk or two. Who knows—you might just hit the jackpot.
- Future Income Needs – If you’re nearing retirement or trying to fund your kids’ college education, you’ll want to maintain a fairly conservative portfolio. If you don’t have any pressing income needs for the near future, you can try your hand at a more aggressive investment strategy. Either way, don’t let hubris or excessive ambition lead you astray.
- Risk Tolerance – In the dynamic world of investing, personality matters. While some people live for skydiving, others just want to dive onto their couch to binge-watch TV (no judgment, Killing Eve is really picking up this season!). If you can’t handle the anxiety and uncertainty of potential losses, lean conservative with your portfolio—your wallet and blood pressure will thank you later.
#2 Play the Long Game
The buy-and-hold strategy is all about investing in a few solid, low-risk stocks with long-term potential and, well, holding on to them. While this strategy offers a relatively high amount of stability and future rewards, it does require quite a bit of patience. So, while you’re waiting, try getting into yoga by doing poses at home or at your local studio—this is not a strategy for the impatient-at-heart.
If you want to estimate how much you can accumulate from a certain stock in a given period of time, input the following details into this handy investment calculator:
- Your starting amount
- The years you have to accumulate income
- The stock’s expected rate of return
- Your contribution amount and frequency
- Your effective tax rate
Using this convenient tool will help you compare different investments and tweak your contribution amounts to meet your desired investment goals. That way, you won’t be jumping into the investment game blindly. Buy-and-hold is as much about discernment as it is about patience.
#3 Diversify, Diversify, Diversify!
Investing effectively is like making the perfect salad—the more you mix it up, the better you feel! You want to diversify by tossing some shredded carrots in with those leafy greens and shake things up with a few candied walnuts or tangerines. The same goes for portfolios—throw in a healthy mélange of stocks, bonds, and funds, and try to mix up the markets in which you’re investing.
In short, diversification is simply the process of placing your eggs in multiple baskets. Not only does that increase the likelihood of receiving some excellent returns, but it also spreads out your risk, just in case one of your eggs is rotten. As we’ve all come to learn, life can be extremely unexpected—don’t put all your stake in one type of stock, just in case Murphy’s Law decides to kick into high gear.
Be Bold, Invest Wisely
No matter what your strategy is, never lose sight of your specific goals and ambitions. While it serves you well to be bold, make sure you’re not comparing yourself to someone else. Your portfolio should be specific to you and your needs. Remember to be wise, be cautious, and reach for the stars (within reason). Happy investing!