My earlier article “why is money important to you” talked about goals. If one of your goals is to have a portfolio, you may need a process for creating your own portfolio. These are the 5 steps I follow:
YOUR GOALS AND CASH FLOW NEED
You know why are you investing but do you know when will you need the cash? When you need it, how much will you need to withdraw? Knowing the answers to these three questions will help you to determine your investing timeline and your tolerance for risk. Knowing your goals, defining your investment time horizon and the cash you will need will guide you through your wealth-management decisions.
APPROPRIATE ASSET ALLOCATION
Know why you are investing, the framework for how you are going to achieve them is asset allocation. The asset classes you choose to invest in and the proportionate amount of savings you would allocate to them. Asset allocation also governs all your other investing decisions. It enables you to narrow your focus, identify when to make portfolio adjustments and to create a portfolio that is tailored to your financial and psychological tolerances for risk.
YOUR INVESTING PREFERENCES
How involved do you want to be in the process of managing your portfolio? How much complexity are you willing to tolerate? Is minimizing costs and taxes key or are you willing to incur some higher (but not excessive) costs to pursue a more active strategy and/or have a professional make the investment decisions/provide guidance? The answers will vary by person. Some individual investors enjoy rolling up their sleeves and analysing individual securities. Some find comfort in working with a financial planner or adviser. Your personality, interest, time and comfort level determine what makes sense for you.
SELECT INVESTMENTS
Your asset allocation strategy and investing preferences guide your decisions made. Asset allocation determines whether you should be looking at equity, fixed-income or cash investment vehicles. Your investing preferences will determine the types of investments you are seeking out, whether they are individual funds, mutual funds, exchange-traded funds (ETFs) or a combination of all three or other combination.
REVIEWING
Always review your portfolio and your investing plan for changes. This involves monitoring your investments to ensure they are not violating your own strategies. Check your allocation to ensure it hasn’t gone too far astray form your targets. Take note of any life or family changes. Retirement, marriage, the birth of a new child or grandchild or a significant change in health warrant revisiting your goals and cash flow needs to see if they are still valid. If a change needs to be made, go back to the first step and revise your investing plan.
