CONSTRUCTING an investment portfolio is similar in nature to a collection. Many people might be able to recall a time in their lives when they enjoyed collecting things such as shells, rocks, bugs, stuffed animals, animation/sports cards, etc.

If this was never a hobby you found interesting, that is okay too, since we all have varying interests. To follow a term often used in investment circles, “one size doesn’t fit all”.

Starting an investment portfolio is very easy. Instead of collecting cards or rocks, you are trying to construct a set of assets that has the potential to grow in value over time, thereby accumulating excess cash which you can use to pay for your living expenses or for reinvestment.

The specific assets collected when building a portfolio will depend on your knowledge and preferences, along with your financial goals and objectives. Some people choose to invest in stocks, some invest in bonds, while others invest in mutual funds, etc. However, most investors choose a combination of these asset classes.

You might be thinking that starting an investment portfolio is a daunting task, yet it really isn’t. Thoughts of where to begin may have surfaced in your mind from time to time, or you may have decided to give it a try but allowed procrastination to get the best of you.

So, how do you commit to change and take action? Here are a few tips which serve as a guide to put you one step closer to starting your investment portfolio.

Firstly, you should develop a plan by outlining your financial goals and investment timeline since this is what is going to drive your purpose for investing. Be sure to have a purpose of what it is you are trying to accomplish, and whether your objective is to accumulate wealth or to preserve your capital.

A portfolio destined for a down payment on a house in seven years will differ from a portfolio designed for your retirement or for your child’s college tuition 18 years from now.

Secondly, you should ask yourself ‘What do I need to know?’ and try to educate yourself as much as possible so that you can know what questions to ask to help you determine what investment options will best suit your financial objectives.

The third step is to determine your tolerance for risk. It is important that you find your comfort zone as all investments come with varying degrees of risk. Being honest with yourself is also crucial. Would you be able to handle seeing the value of your money (portfolio) fluctuate on a day-to-day basis along with the consequent rise and fall of your capital invested?

Some investors are willing to go beyond their comfort zone. However, if you are prone to wild reactions and/or would have trouble sleeping at night every time your portfolio loses value, you might be better suited in selecting more stable investment options. Though it might take you a little longer to achieve the financial goals you have set, at least you will get there with minimal panic and worry.

Lastly, a recommended strategy you can use in getting started is to invest in companies that are known to have a good reputation and that create products which you use or are familiar with. It is prudent to research a company’s products and their financial reputation before investing.

After considering these steps it will be much easier for you to better allocate your assets by formulating a suitable mix. In doing this, one should take into account all of the aforementioned steps, that is: your goals, risk tolerance, and time horizon.

A general rule when constructing a portfolio is that the younger you are, the more risk you can endure, therefore having the capacity to tilt your portfolio more towards stocks as they can be more volatile but have higher long-term returns versus bonds (fixed income).

In mixing a variety of investments in your portfolio, you will be diversifying your asset classes in an effort to reduce risk to your comfort level. Ultimately, your aim is to structure a portfolio that on average will yield your highest possible return and pose a lower risk than any single investment. In other words, you’re seeking the highest return for the least amount of risk.

So you have established an asset allocation strategy that is right for you, and after a one-year period you find that the weighting of each asset class in your portfolio has changed. Now you can think about the process of rebalancing your portfolio in order to set the weight of each asset class back to its original state.

Also, during the course of a year your investment strategy or tolerance for risk might have changed; therefore, you can review the necessary steps to rebalance and adjust the weightings of the securities in your portfolio to fulfil your new investment criteria.

There are smart options to invest in and grow your money that can be tailored to suit your risk tolerance and investment objectives.

Start improving your financial health by building wealth through the power of compounding which occurs over time, so be sure to get started! At SSL we have a six-point plan that can help you to start your investment portfolio. Take action by calling or speaking with a licensed financial advisor today.

Orick Angus is a financial advisor at Stocks & Securities Ltd.