Generally, you should leave the construction of an investment portfolio to your professional investment advisor, especially if you are investing a significant percentage of your total wealth, or if you’re relying solely on the success of your portfolio to meet your future financial goals. However, whether you or your advisor designs your portfolio, consider a few of these well-recognized guidelines.
The term “time horizon” refers to how long you plan to keep your money invested. Your time horizon affects your portfolio design because the longer you plan to keep your money invested, the easier it may be for you to ride out dips in the market. You may be able to tolerate more volatile investments, with potentially higher returns (though time alone is no guarantee of higher returns).
Your personal risk tolerance also affects your portfolio design. Can you sleep at night knowing that a sudden downward shift in the market could cost you a significant portion of your principal? If not, a portfolio that holds a high percentage of aggressive growth stocks, for example, is not right for you. You should match investments to your personal level of risk tolerance.
Your personal liquidity needs may eliminate some investment choices. If you periodically need access to your investment dollars, it makes no sense to design a portfolio dominated by assets that can’t be readily sold or whose value can fluctuate dramatically. Instead, you’ll need investments that can be converted to cash easily and quickly.