Items you will need
- Personal financial statements
- Mutual fund prospectuses
- Annual reports
Investors explore financial markets to provide for important life goals. Diversified portfolios are designed to preserve opportunities for growth, while managing risks. Creating your portfolio begins with a self-assessment, where you detail your life goals and current finances. From there, you will buy assets that match the objectives and stage in life.
Prioritize your life goals. Notable life goals include first-time home purchase, retirement planning, starting a family and paying for education expenses. Use specific details to describe your goals. Rather than simply stating "retirement," you might wish to find part-time consulting work during your Golden Years in Florida.
Calculate the amount of time and costs that are required to reach your life goals. Adjust total costs for inflation, which generally increases expenses at 3 percent annually.
Take a personal financial inventory that lists out your assets, liabilities, income, expenses and insurance policies. Doing so enables you to observe the strengths and weaknesses of your current budget. Further, you might also calculate the amount of additional savings needed to achieve your financial goals.
Subtract monthly expenses from your monthly income to arrive at a monthly cash flow figure. Each month, you will plan to invest this amount efficiently and improve your financial standing.
Sell off any underperforming assets to raise cash for a more effective financial portfolio. Underperforming assets might have fallen behind their respective benchmark for extended periods of at least 18 months. The S&P 500 is a primary benchmark for U.S. stocks.
Assemble Financial Portfolio
Preserve cash flow to build up cash reserves that account for three to six months worth of your living expenses. You may reference your personal financial inventory to calculate the necessary amount. These cash reserves will serve to pay for day-to-day expenses while guarding against an emergency. You may put some cash into money market funds and short-term certificates of deposit in order to earn interest.
Identify asset classes, according to risk versus reward. Higher risk investments, such as small capitalization and international stocks are high-risk and high potential return investments, which are best for long-term commitments. All stocks are volatile, relative to bonds, and generally perform well as the economy improves. In recession, bonds hold value while providing interest income.
Devise an asset allocation, according to your financial objectives. For example, younger savers might build portfolios that include 90 percent stocks and 10 percent bonds. Retirees, however, might reduce risks with an overall allocation of 60 percent bonds and 40 percent stocks. Smaller savers can buy mutual funds for diversification.
Used fixed dollar amounts to buy into your new portfolio with automated monthly withdrawals. Monthly withdrawals reduce the risks of making large financial commitments prior to economic recession.
Monitor and adjust your portfolio as you progress through life. Marriages, childbirth and promotions are ideal times to revisit your financial plan.
Lack of adequate insurance coverage might force you to liquidate your portfolio. Purchase health, life and disability insurance to protect against disaster.
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