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Steps to Building a Profitable Portfolio

Two People Sitting On a Bench Outdoors Looking at A TabletAs an investor, the one thing you desperately want when you put your money into any asset is certainty. You want to be certain that you will make the expected return, and you want to be certain that no unforeseen events will come along to wipe out your capital. But certainty is the single most difficult quality to obtain when investing.


That is because markets are always in flux, and it is almost entirely impossible to predict the direction that things will go. For this reason, investors need a solid strategy that will help them survive upheavals and stay profitable despite what happens within the investment space where they are operating. What are the keys to building this kind of investment portfolio?


A primary foundation for consistent success as an investor is building a well-diversified asset portfolio. Diversification helps you minimize your exposure to uncertainty. Spreading your risks across different investments increases the odds of success while limiting the impact a single investment can have on your success if it fails.


Diversifying your investments will:


  • Minimize the chances of losing your entire portfolioView of Laptop on Glass Table Displaying Charts and Graphs
  • Increase your opportunities to make good returns
  • Protect you from the impact of adverse market cycles
  • Provide a buffer against market volatility


As an investor, to stay profitable in the long term, you need a diverse portfolio of investments. How do you build that kind of portfolio?


Step one: Determine how you want to allocate your assets


Asset allocation is a strategy for balancing risk and reward by dividing the money in your investment portfolio between different asset classes. Investors’ primary factors in deciding how they should allocate their assets are the person’s investment goals, risk tolerance, and how long they expect to hold an asset (their investment horizon).


Typically, many investors divide their money between stocks, bonds, and cash-like assets. Stocks are generally viewed as aggressive assets; they are riskier. Bonds offer lower rates of return, but they are safer. Cash-like assets are the most stable.


One investment you should consider when allocating your assets is real estate. Although it is not a passive source of income like stocks or bonds, including real estate in your portfolio is a proven way to diversify your investments. Moreover, you can make real estate passive by assigning a property manager to oversee the asset. When choosing a property manager for your investment property, be sure to check their marketing strategies. How they market their own management business will show you how they’ll market your property.


Step two: Divide your capital to achieve your portfolio

View From Above of Person Sitting at a Desk With Their Laptop and Some Paper and Pens and a Mug of Coffee

Dividing capital is the actual step of actualizing your asset allocation plan. After determining the best way to allocate your assets, you now have to break those into subclasses. For instance, while it is clear that you want to invest in stocks, you may not know the specific industries or companies you want to invest in. You may also have to decide how much of your capital allocated to stocks will be spent on domestic and foreign stocks.


For the bond portion of your asset allocation, you need to determine how much of the money will go to government versus corporate bonds and long-term versus short-term bonds. It would be best to do the same for your real estate investments. What kind of properties are you going to buy? Do you want to concentrate your properties in a single location or spread them across multiple locations? Should you invest in commercial or residential real estate?


Step three: Periodically reassess your portfolio


Your asset allocation is good only if the conditions originally present when you created the plan remain. But given that life is not static, the factors you initially considered to decide the best ways to diversify your assets will change. Some of these changing factors will necessitate a review of your asset allocation plan.


Three factors that are likely to change fairly often are your risk tolerance, current financial situation, and, maybe, your future needs. On the part of your assets, there will be price movements that alter the value of a particular investment relative to your entire portfolio.


To stay on course with your goal for diversifying your investments, you need to keep abreast of the performance of each asset. You must stay up to date with current or future events that are likely to affect the value of each asset in your portfolio.


Step four: Rebalance your portfolioPaper with Stock Details


Rebalancing is the simple act of moving your capital from one asset class into another. It is essentially a way of adjusting your asset allocation to reflect the realities of the market and stay on course with your investment goals.


For instance, if some of the stocks in your portfolio appreciated strongly in the last year, but you suspect that prices are ready to fall, you could sell those equities and reinvest the proceeds in bonds.


Similarly, suppose your real estate investment in one city is underperforming due to a major employer leaving the area. In that case, you may sell the property to invest the money in student housing or self-storage spaces in a different location.

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