Around 53% of people living in America feel anxious about their financial future. Well, they did in 2018 – there’s a high likelihood that with the pandemic outbreak this year, the figures have jumped through the roof. While the current economic climate is looking a little scary, developing your financial literacy can help you budget, make the most of the money you earn, get back on track after the recession, and help you build a healthy investment portfolio.
Building an investment portfolio is a superb way to grow your savings, work towards financial independence, and plan for a comfortable retirement. No matter whether you’re 15 or 65, there are steps you can take to improve your financial situation. We have collated 4 tips to help you develop a healthy investment portfolio.
Diversify Your Investments
One of the most important rules for any investment portfolio is to diversify. Diversification is imperative if you want to build a healthy investment portfolio. If you have been investing in commercial real estate, for example, you might consider purchasing a residential investment property or buying some shares. Even if you aren’t confident in your knowledge of the stock market, you can put some money into Exchange Trading Funds (EFTs). This investment vehicle allows you to invest in a range of companies at once.
For example, the S&P 500 represents an index of the top performing 505 US stocks. The significant advantage of diversification is that each investment opportunity will have unique risks and market pressures. By spreading your money into multiple different areas, any dip in one investment should be supported by gains across the others.
In addition, in some cases, keeping your investments diverse could also mean knowing when to get out of an investment. Having an exit plan is important if an investment isn’t turning out the way you’d expected. An essential tip to note is to monitor the market conditions and stay up to date and current with your investments. Doing so, you’d know when to cut losses, sell, and move forward to another investment.
Check the Fee Structures
Another tip to building a healthy investment portfolio is to understand your investment account fee structure. No matter where you decide to invest, you should always do your research. Banks, EFTs, stockbrokers, and superannuation funds all charge fees for their services. There is a wide variation to the fee structures that may apply. With this in mind, it is vital to check the fine print and compare your options.
Moreover, if you’re looking into hiring an investment broker or financial advisor or already have one, note that you’re required to pay management fees. Management fees typically depend on your investment amount and the management strategy.
Aggressive, high-risk investments generally have higher management fees due to higher turnover of securities, thus involving more work on your broker’s end. Meanwhile, passive investments have lower management fees.
Know Your Risk Profile
You may have come across the concept of a risk profile in relation to your retirement fund. Understanding your personal risk profile is something you must do when trying to build a healthy investment portfolio.
If you have no idea what your profile is, then it is worth taking a quick look. In essence, each person has a certain comfort level when it comes to taking financial risks. This level is often linked to their age as well as their personality.
Moreover, your investment risk profile could also be connected to your relationship with money. For instance, people with stable jobs and extra money to spare can be more adventurous with their finances and investments. On the other hand, individuals with a frugal lifestyle tend to be more conservative with their spending, which lowers the investment risks they can tolerate.
With that in mind, knowing your financial profile can be vital to building a healthy investment portfolio. You can check Denise Duffield-Thomas money archetypes if you still don’t know yours.
High-risk investments can result in high levels of growth but also may result in losses. Lower risk investments are unlikely to make as much money but are “safer” options. If you are risk-averse, you should look to purchase bonds or place your money in a high-interest savings account. Property, shares, and commodities are all considered to be higher risk options. That being said, they do come with the chance of big gains for those who can tolerate the uncertainty.
Be Conscious Your Liquidity Needs
Your liquidity means how quickly you could access your money in cash if you needed it. For example, if you have invested in real estate and suddenly needed a significant amount of money fast, you might find yourself in a tough spot. It takes time to sell your property or to borrow against the equity that you have. It is very important to consider your liquidity needs when trying to develop a healthy investment portfolio.
Conversely, selling shares is a reasonably quick and easy process, but having unexpected expenses crop up may mean you have to sell when the market isn’t ideal. Liquidity is yet another reason why it’s so important to have a diverse portfolio. You can weigh up the positives and disadvantages of liquidating each option and go with the one that will cause the least damage.
How to Develop a Healthy Investment Portfolio – Summary
The earlier you start to build an investment portfolio, the more you will learn, and the more money you will make. So, get researching and start investing!