Building A Portfolio

Building A Portfolio

An investment portfolio is a collection of assets that will grow in value over time. This growth will create excess money by which one can then spend or reinvest.   For some, a portfolio can be likened to a pie chart whose portions represent vehicles by which the investor has allocated a certain portion of the entire investment. This unique combination of monetary vehicles will determine the risk of one’s investment and the expected return.

Invest Wisely

It is imperative that one know their own personal financial situation when building an investment portfolio.  An investor’s financial position determines their investment objectives and the overall success of their investments-know thyself. As such, safety of capital, current income and capital appreciation are all factors that will influence an investment decision. Secondary factors include a person’s age, position/stage in life, and personal circumstances. For example, a newly married couple just starting out will have much more to lose if an investment fails when compared to a seasoned executive. The newly married couple would likely be living off of their investment returns while the seasoned executive with a hundred thousand dollars to invest likely has other means by which to support his/her lifestyle. For the executive, a hundred thousand dollars is a small percentage of his overall worth whereas the newlywed couple would have a lot more to risk, seeing as their investment constitutes a much larger percentage of their overall worth. Individuals throughout all stages of their life should consider these factors when considering investment strategies.  Furthermore, knowing thyself logically determines one’s knowledge and subsequent attitude toward their investments. If one doesn’t understand an asset then it is remotely impossible to understand how it generates capital. Consequently, one is not investing but taking a gamble. Under this light the concept can be likened to an investor’s capacity to take on, or maintain a solid understanding of the factors that determine their “risk-tolerance”. The relationship between knowing thyself and knowing thy investments determine risk tolerance, which is critical for attaining one’s investment objectives.

Keep Expenses Low

When investing it is critical to keep overhead expenses low. This typically refers to interest rates that are tied to whatever the asset is, where it is extremely important to find a broker who understands the importance of keeping costs low. With this in mind, one can assess different options for keeping costs low such as getting a realtors license to directly represent oneself when buying investment properties. Here, thousands of dollars can be saved in overhead fees that could be used for buying more properties. Over a lifetime cost saving strategies could bolster an individual’s net worth significantly.  Moreover, if time is money then grasping the concept of compounding would make all the difference to the savvy investor.

Graph showing a personal portfolio summary/.

Pay Off Debt

For both long term and short term investments, paying off debt is critical.  The phrase “time is money” can also work against an investor. Logically, the longer debt goes unpaid the less overall earnings an investment will generate (assuming interest is being applied). Here to effectively generate the highest income from an investment one must be in the clear and not owe any money that will depreciate their overall net value.

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