WHAT SHOULD I CONSIDER WHEN BUILDING A PORTFOLIO?

Know your style.

As you start to delve into the world of investing, you need to understand what your investing style is.  Some investors are risk takers by nature, while others prefer the security of cash in the bank. However, most investors fall somewhere in between these extremes. They are willing to assume some risk and understand that they may be rewarded with higher returns. Your style is determined by your age, personality, financial experience, and financial circumstances.

Diversify your portfolio.

You can reduce the level of market risk in investing by distributing your investment dollars among different markets, sectors, industries, and securities. The goal here is to protect the value of your overall portfolio against a drop in price in a single security and/or a market sector downturn. The old adage holds true—don't put all your eggs in one basket. When your investments are diversified, or spread across different asset classes or types of securities, they work together to help reduce risk. Remember that diversification cannot eliminate the risk of fluctuating prices and uncertain returns.

Here are a few examples of the many ways to diversify your investments. You should consult a Financial Advisor about what mix is right for you. These examples are provided for information purposes only and do not represent a specific recommendation.

Asset Allocation Chart

Allocate your assets.

Asset allocation is the way in which you spread your money across various classes of investments, including stocks, bonds, and cash reserves.  According to Markowitz's 1990 Nobel Prize winning theory, almost 92% of your investment returns depend on how your assets are allocated among the different classes, while only about 2% is due to the actual stocks and bonds you choose to buy. Spread your investment dollars across different asset classes or sectors, instead of concentrating funds in one or two types of stocks. Consider mutual funds that spread your investments into dozens of different industries. If one of the industries you’re invested in starts to wane, your loss will stand a better chance of being offset by the potential success of another industry in which you’re invested. Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns. The objective is to select a model that will support your goals at a comfortable level of risk.

Time, not timing.

Trying to time when to invest can be tricky. Even if you were to anticipate the market correctly and receive greater returns on your investments, frequent trading can jeopardize your portfolio. The history of the stock market shows that those who merely remained invested over a long period—regardless of how the market was performing at any given time—did better than those who tried to time the market.

Compare investing early to investing later.

Let’s evaluate two individuals who invest on an annual basis for a specified period of years. 

Susan started investing at age 19 and earned a 10% hypothetical annual growth rate on her investment.  She contributed $2,000 per year between the ages of 19 and 26 for a total of $16,000.  Susan stopped investing at age 27 and is leaving the money in her chosen investment vehicle.  At age 65, she will have $1,035,148.

Kim started investing at age 27 and earned a 10% hypothetical annual growth rate on her investment.  She contributed $2,000 per year starting at age 27 and will continue until she is 65 for a total of $78,000.  At age 65, Kim will have $883,185, which is approximately $120,000 less than Susan.

Stay committed. One of the most effective and convenient ways to take advantage of the power of time is to invest through a Systematic Investment Plan. Investing a predetermined amount of money on a regular basis is a proven approach to accumulate wealth over time.  The strategy of dollar cost averaging, encourages discipline, eliminates the need to decide when to invest, and avoids the temptation to time the market. By investing at regular intervals, the costs of shares tend to even out the market’s peaks and valley’s.  Your dollars purchase fewer shares when the market is up, but they buy more when it’s down. However, a regular investment program neither provides assurance of making a profit nor guarantees against a loss in a declining market. A little goes a long way. Investing monthly can add up over time: Monthly Investment - $100   Investment Period Total invested Account value 10 years $12,000 $18,294 20 years $24,000 $58,902 30 years $36,000 $149,035 Chart assumes $100 invested monthly for 10, 20, and 30 years and compounded at 8%. This hypothetical example is for illustrative purposes only and does not represent any specific investments. Actual returns and principal value will fluctuate.