When developing a portfolio for the average investor the key points you need to consider are: time horizon, taxability, liquidity, risk and diversification.
- The first thing you have to figure out is what time frame you are going to need the money. The longer time you have before you need the money the more aggressive you can be. Due to the time you have to ride out cycles of the stock market. Saving for retirement is different than saving for the down payment for the purchase of a house. You can invest for the long term if you have a number of yours until you need the funds. By increasing the amounts of risk you are taking you can statistically increase your returns.
- The second thing to take into account is how the money is going to be taxed. Investments that are in a tax-free environment can stand more ordinary income. With taxable income you can write-off losses that you incur. Also capital gains are preferable to ordinary income in a taxable environment.
- The next area that you need to worry about is the amount of liquidity available with your portfolio. The longer you have to invest the more able you are to use illiquid assets like real estate. Real estate functions on a longer cycle than stocks.
- You can’t expect return without taking a little risk. Risk translates volatility. The level of risk that you take is what you personally can tolerate. Risk is measured in different ways including standard deviation and/or beta. They are measured relative to the standard deviation and/or beta respectively of the market as a whole.
- Last but not least to be sure that your portfolio is diversified by having enough holding, by industry and by type of investment. Income oriented investments tend to have different characteristics than appreciation driven investments. International funds add an extra level of risk in the fact that there is an exchange rate in play in addition to the underlying stock making then inherently more volatile.
You needn’t go it alone; contact a financial planning professional.