Wondering how to Fortify Your Investment Portfolio? Read These Great Tips!

Understanding yourself (your needs, wants, and emotional impulses) is one of the most effective ways to start your investing journey. After all, it was Aristotle who said, “Knowing yourself is the beginning of all wisdom.” Whether you are just beginning your investment journey or have been down that road for some time, it’s valuable to check in and evaluate your risk tolerance. Understanding yourself can help you (and your advisor) choose an appropriate investment portfolio. Our monthly guest blogger and resident Certified Financial Planner™, Nichole Coyle, has tips on choosing a diversified portfolio.

How do I Build a Diversified Investment Portfolio? 

Knowing your personal risk tolerance is key to building a diversified investment portfolio that helps meet your financial needs. Risk tolerance means how much risk you can handle as an investor to meet your goals.

What is a Diversified Portfolio, and Why Do You Need One? 

A diversified portfolio is built from various assets like stock and bond funds. It includes various sectors such as oil and gas, utilities, consumer staples, commodities, and real estate. By diversifying what you invest in, your exposure to any one type of asset is limited in the event of a downturn.

How Can it Help Me Avoid Market Fluctuations? 

While a diversified investment portfolio does not make you immune to market fluctuations, it can help you weather some of the storms. For example, a diversified portfolio carries less risk than having purchased only one company’s stock. If that one company takes a significant hit or fails, you experience a big loss. Instead, a diversified portfolio can be made up of investments that balance each other. Having one company take a significant hit or fail won’t impact your overall portfolio on such a grand scale.

In addition, regardless of how high or low the stock market is on any given day, utilizing dollar cost averaging can help minimize the impact of volatility when investing. One way to do this is to contribute to your employer-sponsored retirement plan. Your contributions are added automatically because funds are invested from each paycheck, often every two weeks or twice per month. This can also be done by setting up regular automatic contributions to individual IRAs.

Essentially, a one-time purchase of one stock usually requires a much higher risk tolerance than a well-diversified portfolio (especially one that utilizes dollar cost averaging).

According to Investopedia, risk tolerance is the degree of risk that an investor is willing to endure, given the volatility in the value of an investment. An essential component in investing, risk tolerance often determines the type and number of investments that an individual chooses.

Why Does Risk Tolerance Matter?

You may have heard the saying, “The higher the risk, the higher the reward.” Case in point: the S&P 500 index has averaged gains of approximately 10.7% annually since its inception in 1957, according to Business Insider. Compare that with a savings account, which currently returns an average of .13% annually according to Bankrate. However, savings accounts provide stable value, while the stock market can sometimes be quite volatile.

Knowing your risk tolerance is very important and can change based on the specific goals you have for the funds you are considering investing. For example, you don’t invest your emergency fund money into a risky investment in hopes of a high return because you need that money to be easily accessible in a crisis. Likewise, you don’t invest your retirement fund money into a savings account because you need it to grow and compound over time to outpace inflation and increase the amount of your retirement nest egg.

Knowing your risk tolerance will allow a financial professional, like myself, to develop the most accurate portfolio of assets. Your portfolio may include equity funds, bond funds, annuities, or other investment options to help you build wealth, save for retirement, or pursue other financial goals.

As a reminder, all investments involve some degree of risk, some more than others.

How Do I Identify My Risk Tolerance? 

To identify your risk tolerance for your investment portfolio, consider the following factors:

• Your age
• Investment objectives and timeframe to achieve them
• Emotional ability to handle risk
• What you can afford to lose
• How do you react when the markets go up and down

Remember that your risk tolerance will change over time for many reasons. It may vary due to your investment timeframe, lifestyle, family composition changes, and more. It’s a good idea to check in with your advisor when something changes that may impact your risk tolerance.

Reach Out If You Need Help!

If you have questions about this or any other financial topics, please don’t hesitate to contact me.

Nichole M. Coyle,
CERTIFIED FINANCIAL PLANNER^TM
20333 Emerald Pkwy, Cleveland, OH 44135
216.621.4644 x1607

Securities and advisory services offered through Cetera Advisor Networks LLC, member FINRA/SIPC, a Broker-Dealer, and a Registered Investment Advisor.
Cetera is not affiliated with the financial institution where investment services are offered or any other named entity.
Investments are: Not FDIC/NCUSIF insured * May lose value * Not financial institution guaranteed * Not a deposit * Not insured by a federal government agency.
All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful.
Investors should consider the investment objectives, risks, charges and expenses associated with municipal fund securities before investing. This information is found in the issuer’s official statement and should be read carefully before investing.
Dollar cost averaging will not guarantee a profit or protect you from loss, but may reduce your average cost per share in a fluctuating market.
Distributions from traditional IRA’s and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59 ½, may be subject to an additional 10% IRS tax penalty.
Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing. A diversified portfolio does not assure a profit or protect against loss in a declining market.

Posted In: Guest Blog, Tips For Managing Finances