How to Build a Model Portfolio with Investments

Stocks should be long-term investments.

Saving for your own future has never been more essential. With traditional retirement plans fast disappearing, workers are being asked to shoulder more of the burden of their finances, planning for everything from the education of their children to how they will handle a financial emergency like the sudden loss of a job. It is never too early to start building a portfolio for the future, and the sooner you get started the more you can save.

Instructions

1. Write down a list of your financial goals, and separate those goals into short-term and long-term categories. Building up an emergency fund and saving up for a new car are both examples of short-term goals, while saving for retirement and building a college fund for your kids are both examples of long-term goals.

2. Decide how much of your income you want to allocate to your short-term and long-term goals. Paying yourself first is one of the best ways to force yourself to save money and build for the future.

3. Divert a portion of each paycheck to start building for your short-term goals. You can split your direct deposit and direct that part of your pay go into a savings or money market fund designated for that purpose.

4. Research available investment options for the long-term portion of your portfolio. You can invest in individual stocks, mutual funds, international investments and commodities to build a well-rounded portfolio. The exact proportion of each asset class depends on a number of factors, including your age, your investment horizon and your tolerance for risk. Generally, younger investors can afford to take more risk, since they have time to recover from the inevitable short-term setbacks. Tilting the portfolio more toward stocks and stock mutual funds when you are young can help you grow your money over the long run, even if the short-term market moves can be unnerving.

5. Establish an automatic investment plan for the mutual funds you have chosen. Setting up an automatic investment plan carries a number of options. When you invest consistently over time, you automatically buy more shares when prices are down, and fewer when prices are up. That strategy, known as dollar cost averaging, helps you build a larger portfolio over time.

6. Evaluate your portfolio each year and calculate the percentage you have in stocks, bonds, commodities and other investment classes. Compare those percentages to your optimum asset allocation, then make any necessary changes to bring your portfolio back in line.

References

• Securities and Exchange Commission: Beginner's Guide to Asset Allocation, Diversification, and Rebalancing
• Securities and Exchange Commission: Financial Navigating in the Current Economy: Ten Things to Consider Before Making Investment Decisions