Key Steps to Building Your Portfolio

Revisiting the Basics Can Build Confidence in Your Financial Plan in the Face of Volatility

In all market environments, it’s important to understand the fundamentals behind your investment strategy, portfolio composition and overall financial plan. Understanding the underlying elements will help you advance your financial objectives and can provide well-founded confidence that may just help you stick with your plan in times of uncertainty.

First things first
Three essential elements hold up the structure of a well-balanced portfolio: Risk tolerance, asset allocation and that most ubiquitous of investment terms, diversification. They each complement and strengthen each other.

Your real risk tolerance
One of the most critical elements in investing, your tolerance for risk informs your asset allocation, which in turn determines how well-diversified you are. To evaluate your tolerance for risk, it may be most helpful to think in terms of dollars. If your latest monthly statement on your once-$750,000 portfolio now reads $598,000, how are you going to react? That’s a 20% decline – not outside the realm of possibility – so if seeing the number raises concerns, it may be time to rethink things with the help of your advisor.

Aligning risk tolerance with asset allocation
Your true risk tolerance, along with your time horizon, provides guidelines for allocating your capital among different asset classes – including stocks, bonds, cash and other investments – and each carries its own level of risk.

The classic balanced portfolio of 60% stocks / 40% bonds can provide a good initial reference point, but there’s also nothing wrong with cash, especially for near-term goals. Your advisor can be very helpful here, so it’s vital to provide your total financial picture, including securities you hold in other accounts and property such as vacation homes or boats.

Diversification and asset allocation do not ensure a profit or protect against a loss. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Time horizon comes into play
Your time horizon – when you’ll need the money – plays heavily into what asset classes you include in your portfolio. You’ll likely make different investment decisions depending on whether you’re saving for a short-term goal, like a down payment on a home, or a longer-term one, like retirement.

Someone just starting out may be willing to assume greater investment risk as a trade-off for potentially higher returns given the longer time frame available to offset potential losses, while those approaching retirement may prefer less risky investments.

Aim for true diversification
Once you have settled on an overall asset allocation, make certain you are well-diversified within each asset class and investment style. Non-correlated investments, those that move independently of each other, can help your portfolio weather market gyrations better.

Automate it
Once you’ve got the details down, the second stage is to automate your investing – a way of committing to the plan. There are two benefits here: 1. Dollar-cost averaging,* in which you’ll buy some assets at higher prices and some at a discount, thus averaging out your total cost basis; 2. Compounding, which is the time-tested strategy of letting your investments continue to grow unabated, allowing your wealth to multiply itself over time.

Foundational elements need to be flexible, too
The financial markets have an endless capacity to surprise, so it’s important to remain flexible and think of your financial plan as dynamic – something built on time-tested principles but also something you revisit periodically and can revise if conditions change fundamentally.

*Dollar cost averaging does not assure a profit and does not protect against loss. It involves continuous investment regardless of fluctuating price levels of such securities. Investors should consider their financial ability to continue purchases through periods of low price levels.

(Diversification and asset allocation do not ensure a profit or prtection against a loss. Investing involves risk and you may incur a profit or loss regardless of strategy selected.)

Next steps:

  • Review your current portfolio to determine where adjustments need to be made.
  • If you haven’t considered potential loss in dollar amounts, put your assets to the test. What would a 20% loss really look like?
  • Set aside time to meet with your professional advisors. They can help you make the necessary tweaks and develop a portfolio that works for you.
*Material provided by Raymond James for use by its advisors.
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