One method to alle­vi­ate your fear of the mar­ket is to do your home­work on “the mar­ket”. Not all assets behave in the same man­ner at the same time. Some go up when oth­ers go down. By build­ing a port­fo­lio that takes this into con­sid­er­a­tion, you spread your risk across all areas of the mar­ket. In so doing, you take advan­tage of being in areas of the mar­ket that are going up as well as those that are going down evening our your over­all invest­ment return.

But how do you actu­al­ly go about cre­at­ing an invest­ment port­fo­lio? What spe­cif­ic invest­ments are right for you? What resources are out there to help you with invest­ment deci­sions? Do you need a finan­cial pro­fes­sion­al to help you get start­ed?


A good investment portfolio will spread your risk

It is an almost uni­ver­sal­ly accept­ed con­cept that most port­fo­lios should include a mix of invest­ments, such as stocks, bonds, mutu­al funds, ETF’s, and oth­er invest­ment vehi­cles. A port­fo­lio should also be bal­anced. That is, the port­fo­lio should con­tain invest­ments with vary­ing lev­els and types of risk to help min­i­mize the over­all impact if one of the port­fo­lio hold­ings declines sig­nif­i­cant­ly.
Many investors make the mis­take of putting all their eggs in one bas­ket. For exam­ple, if you invest in one stock, and that stock goes through the roof, a for­tune can be made. On the oth­er hand, that stock can lose all its val­ue, result­ing in a total loss of your invest­ment. Spread­ing your invest­ment over mul­ti­ple asset class­es should help reduce your risk of los­ing your entire invest­ment. How­ev­er, remem­ber that there is no guar­an­tee that any invest­ment strat­e­gy will be suc­cess­ful and that all invest­ing involves risk, includ­ing the pos­si­ble loss of prin­ci­pal.


Asset allocation: How many eggs in which baskets?

Asset allo­ca­tion is one of the first steps in cre­at­ing a diver­si­fied invest­ment port­fo­lio. Asset allo­ca­tion means decid­ing how your invest­ment dol­lars should be allo­cat­ed among broad invest­ment class­es, such as stocks, bonds, and cash alter­na­tives. Rather than focus­ing on indi­vid­ual invest­ments (such as which com­pa­ny’s stock to buy), asset allo­ca­tion approach­es diver­si­fi­ca­tion from a more gen­er­al view­point. For exam­ple, what per­cent­age of your port­fo­lio should be in stocks? The under­ly­ing prin­ci­ple is that dif­fer­ent class­es of invest­ments have shown dif­fer­ent rates of return and lev­els of price volatil­i­ty over time. Also, since dif­fer­ent asset class­es often respond dif­fer­ent­ly to the same news, your stocks may go down while your bonds go up, or vice ver­sa. Though nei­ther diver­si­fi­ca­tion nor asset allo­ca­tion can guar­an­tee a prof­it or ensure against a poten­tial loss, diver­si­fy­ing your invest­ments over var­i­ous asset class­es can help you try to min­i­mize volatil­i­ty and max­i­mize poten­tial return.

So, how do you choose the mix that’s right for you? Count­less resources are avail­able to assist you, includ­ing inter­ac­tive tools and sam­ple allo­ca­tion mod­els. Most of these take into account a num­ber of vari­ables in sug­gest­ing an asset allo­ca­tion strat­e­gy. Some of those fac­tors are objec­tive (e.g., your age, your finan­cial resources, your time frame for invest­ing, and your invest­ment objec­tives). Oth­ers are more sub­jec­tive, such as your tol­er­ance for risk or your out­look on the econ­o­my. A finan­cial pro­fes­sion­al can help you tai­lor an allo­ca­tion mix to your needs.


More on diversification

Diver­si­fi­ca­tion isn’t lim­it­ed to asset allo­ca­tion, either. Even with­in an invest­ment class, dif­fer­ent invest­ments may offer dif­fer­ent lev­els of volatil­i­ty and poten­tial return. For exam­ple, with the stock por­tion of your port­fo­lio, you might choose to bal­ance high­er-volatil­i­ty stocks with those that have his­tor­i­cal­ly been more sta­ble (though past per­for­mance is no guar­an­tee of future results).

Because most mutu­al funds invest in dozens to hun­dreds of secu­ri­ties, includ­ing stocks, bonds, or oth­er invest­ment vehi­cles, pur­chas­ing shares in a mutu­al fund reduces your expo­sure to any one secu­ri­ty. In addi­tion to instant diver­si­fi­ca­tion, if the fund is active­ly man­aged, you get the ben­e­fit of a pro­fes­sion­al mon­ey man­ag­er mak­ing invest­ment deci­sions on your behalf.

Note: Before invest­ing in a mutu­al fund, care­ful­ly con­sid­er its invest­ment objec­tives, risks, charges and expens­es, which are out­lined in the prospec­tus that is avail­able from the fund. Obtain and read a fund’s prospec­tus care­ful­ly before invest­ing.



Your tol­er­ance for risk is affect­ed by sev­er­al fac­tors, includ­ing your objec­tives and goals, timeline(s) for using this mon­ey, life stage, per­son­al­i­ty, knowl­edge, oth­er finan­cial resources, and invest­ment expe­ri­ence. You’ll want to choose a mix of invest­ments that has the poten­tial to pro­vide the high­est pos­si­ble return at the lev­el of risk you feel com­fort­able with on an ongo­ing basis.


For that rea­son, an invest­ment pro­fes­sion­al will nor­mal­ly ask you ques­tions so that he or she can gauge your risk tol­er­ance and then tai­lor a port­fo­lio to your risk pro­file.


Investment professionals and advisors

A wealth of invest­ment infor­ma­tion is avail­able if you want to do your own research before mak­ing invest­ment deci­sions. How­ev­er, many peo­ple aren’t com­fort­able sift­ing through bal­ance sheets, prof­it-and-loss state­ments, and per­for­mance reports. Oth­ers just don’t have the time, ener­gy, or desire to do the kind of thor­ough analy­sis that marks a smart investor.

For these peo­ple, an invest­ment advi­sor or pro­fes­sion­al can be invalu­able. Invest­ment advi­sors and pro­fes­sion­als gen­er­al­ly fall into three groups: stock­bro­kers, pro­fes­sion­al mon­ey man­agers, and finan­cial plan­ners. In choos­ing a finan­cial pro­fes­sion­al, con­sid­er his or her legal respon­si­bil­i­ties in select­ing secu­ri­ties for you, how the indi­vid­ual or firm is com­pen­sat­ed for its ser­vices, and whether an indi­vid­u­al’s qual­i­fi­ca­tions and expe­ri­ence are well suit­ed to your needs. Ask friends, fam­i­ly and cowork­ers if they can rec­om­mend pro­fes­sion­als whom they have used and worked with well. Ask for ref­er­ences, and check with local and fed­er­al reg­u­la­to­ry agen­cies to find out whether there have been any cus­tomer com­plaints or dis­ci­pli­nary actions against an indi­vid­ual in the past. Con­sid­er how well an indi­vid­ual lis­tens to your goals, objec­tives and con­cerns.



Stock­bro­kers work for bro­ker­age hous­es, gen­er­al­ly on com­mis­sion. Though any invest­ment rec­om­men­da­tions they make are required by the SEC to be suit­able for you as an investor, a bro­ker may or may not be able to put togeth­er an over­all finan­cial plan for you, depend­ing on his or her train­ing and accred­i­ta­tion. Ver­i­fy that an indi­vid­ual bro­ker has the req­ui­site skill and knowl­edge to assist you in your invest­ment deci­sions.


Professional money managers

Pro­fes­sion­al mon­ey man­agers were once avail­able only for extreme­ly high net-worth indi­vid­u­als. But that has changed a bit now that com­pe­ti­tion for invest­ment dol­lars has grown so much, due in part to the pro­lif­er­a­tion of dis­count bro­kers on the Inter­net. Now, many pro­fes­sion­al mon­ey man­agers have con­sid­er­ably low­ered their ini­tial invest­ment require­ments in an effort to attract more clients.

A pro­fes­sion­al mon­ey man­ag­er designs an invest­ment port­fo­lio tai­lored to the clien­t’s invest­ment objec­tives. Fees are usu­al­ly based on a slid­ing scale as a per­cent­age of assets under management–the more in the account, the low­er the per­cent­age you are charged. Man­age­ment fees and expens­es can vary wide­ly among man­agers, and all fees and charges should be ful­ly dis­closed.


Financial planners

A finan­cial plan­ner can help you set finan­cial goals and devel­op and help imple­ment an appro­pri­ate finan­cial plan that man­ages all aspects of your finan­cial pic­ture, includ­ing invest­ing, retire­ment plan­ning, estate plan­ning, and pro­tec­tion plan­ning. Ide­al­ly, a finan­cial plan­ner looks at your finances as an inter­re­lat­ed whole. Because any­one can call him­self or her­self a finan­cial plan­ner with­out being edu­cat­ed or licensed in the area, you should choose a finan­cial plan­ner care­ful­ly. Make sure you under­stand the kind of ser­vices the plan­ner will pro­vide you and what his or her qual­i­fi­ca­tions are.

Finan­cial plan­ners can be either fee based or com­mis­sion based, so make sure you under­stand how a plan­ner is com­pen­sat­ed. As with any finan­cial pro­fes­sion­al, it’s your respon­si­bil­i­ty to ensure that the per­son you’re con­sid­er­ing is a good fit for you and your objec­tives.