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The Four Basic Parts of Creating an Investment Portfolio

September 14, 2022

Do you know what kind of investor you are? How do you plan to reach retirement with enough money to live the lifestyle you want? Today, Nelson Financial Planning will review the four basic parts of creating a successful investment portfolio. It’s a full-circle conversation that will take you from your early days of investing to your later years in retirement.

Establishing Your Investment Objective

This is where you set your goals and start your plan. Your investment objective depends on several factors.

Risk tolerance compares volatility and stability. How much fluctuation can you tolerate? How do you feel about changes in your account? Will you stick with your investment plan if the market takes an unexpected turn?

If you’re unsure of your risk tolerance, search for online questionnaires to help you assess your stance. A popular option is the global portfolio allocation scoring system (PASS). This provides a series of statements that you respond to with “strongly agree,” “strongly disagree,” or something in between. Your score reveals your risk tolerance, giving you a good place to start when establishing your investment objective.

Your time horizon determines whether you’re looking for a short-, intermediate-, or long-term investment. For instance, saving for a down payment is a short- or intermediate-term goal that can’t withstand much volatility. In this case, you’re better off earning a little interest in your savings account than investing in a potentially volatile market.

A longer time horizon, such as saving for retirement starting in your 20s or 30s, allows you to take on more risk. Reassess your time horizon every few years as you approach retirement to ensure it still aligns with your investment objective.

Having reasonable performance expectations means you understand the likely yield, rate of return, and capital gains and losses of your investments. If you’re sitting in cash and expect your portfolio to generate a certain income or grow to a certain level over time, you’ll end up disappointed. You have to accept some risk to get the performance you want.

On the other hand, if you’re in a very aggressive portfolio and expect a steady income, you’ll end up disappointed. You must be willing to accept major swings in your balances and know that you might not always get the timing right when making withdrawals.

Knowing What You Should Invest In

One size doesn’t fit all, so discuss your various investment options with a trusted financial advisor. Here’s a look at the three basic types of investments.

Stocks grant ownership or equity interest in a particular company. You then share in the company’s success through dividend payments, stock price growth, or both. Stocks come in three different categories—growth companies, value companies, and blended companies.

Bonds are issued by governments and corporations to generate cash. Buying a bond lends money to the issuer, who agrees to repay the principal plus interest over a specified amount of time. Return rates are relatively low but have less fluctuation, making bonds a good short- and intermediate-term investment.

Mutual funds are more diversified and less risky than buying individual stocks or bonds. Multiple investors pool their money to buy a handful of stocks or bonds, which a knowledgeable team actively manages to promote the best return.

Deciding How to Fund Your Investments

Once you know your objective and what you want to invest in, it’s time to start saving. Here are the four steps of funding an investment account.

Set your goals. Most people want the same standard of living once they retire. To make sure you have enough money, first consider your current gross salary. Then, subtract the following:

  • Social Security taxes
  • Medicare taxes
  • 401K contributions
  • Deferred compensation plan contributions
  • Social Security benefits
  • Pensions
  • Other sources of income besides your gross salary

You now know how much income you need your portfolio to generate to maintain your standard of living after retirement. Now it’s just a quick calculation of how much you currently have saved, how much you’re saving annually, and how many years you have until retirement.

Create a budget. As a general rule, it’s wise to save 10 to 13 percent of your gross salary for retirement. If you’re close to retirement age and your portfolio isn’t in good shape, consider changing your goals. Maybe push out retirement a few years or lower your anticipated retirement income expectations

Decide which accounts to invest in. There are two general categories—retirement accounts and regular investment accounts. The best ones for you depend on your employment situation, desired contribution amounts, and tax implications. Your options include:

  • Employer-sponsored retirement savings, including 401K, 403B, and 457 plans
  • Individual Retirement Accounts (IRAs)
  • Brokerage accounts
  • Certificates of Deposit (CDs)
  • Other traditional investment accounts

Determine how and when to invest. When it comes to funding your accounts, it’s all about the time in the market, not timing the market. In other words, saving consistently over a longer period provides a more favorable outcome than trying to catch up later in life.

Understanding How to Take Money Out

The most exciting part of saving for retirement is the chance to make your investments work for you. Before you retire, assess all your retirement assets and figure out a comfortable withdrawal rate, preferably at around 4 percent, to ensure your savings last. Remember, part-time work can help supplement your retirement income if you haven’t saved enough.

Follow these four steps to generate the ideal income from your portfolio:

  • Analyze your savings. How much have you saved?
  • Review your goals. How do you want to live in retirement?
  • Develop a budget. How will you utilize your savings?
  • Determine your desired income. How much income do you want, and how much can you get?

At Nelson Financial Planning, we can help you change your life with a successful financial plan that provides peace of mind for the future. We help clients of all ages and income levels maximize their retirement accounts using today’s best investment strategies. To learn more, please contact us online or call our Winter Park, FL, office at 407-307-3061.