There's more to successful portfolio building than picking good investments.
Putting together a portfolio of securities is like building a wardrobe. Even if your closet is filled with top-of-the-line attire, that may not be enough: All those components need to work together as outfits. Investment portfolios are the same way.
This track of the Investing Classroom will show you how to design a successful portfolio of investments that work together to help you reach your goals. In this course, we'll introduce the five essential steps to tailoring your portfolio and keeping it in good shape. We'll expand on these steps in subsequent courses.
Create a pattern
Just as a tailor making a suit starts with a pattern, you need a pattern for your portfolio. The tailor's pattern fits an individual of a particular size and shape. Similarly, your portfolio should fit you.A good fit starts with your investing goal. Maybe you're investing for retirement, for your child's education, or for a vacation home. We'll cover goals at length in Portfolio 102: Determining your goals and what they'll cost.
Whatever your goal, it gives you vital information. It tells you how long you'll be investing (your time horizon) and how much of your investment you can put at risk. The closer your goal or the less you can afford to lose, the more you should focus on preserving what you've made rather than on generating additional gains.
How much should you put into cash, bonds, and various types of stocks? One rule of thumb is to use your age as a guide. For instance, if you're 33 years old, put 33% of your portfolio into cash and bonds and the rest into stocks.
Some investors would find that figure awfully conservative, though. Others might find that it's too aggressive for their particular goal. Such rules are like a one-size-fits-all shirt: Sure, you can wear it, but does it really suit you? Probably not. We'll show you how to determine what cash/bond/stock mix is right for you in Portfolio 105: Determining your asset mix.
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Discover what you already own
Maybe you can name all of your stocks and mutual funds off the top of your head and detail how each one performed last week. Good for you. But can you explain how they work together? Which are your core investments? Are you diversified? Do you have a lot of overlap? You must be able to answer those questions before you can see how (or even if) your portfolio fits your pattern.To figure out exactly what you own, you could buy a financial calculator or investing spreadsheet, haul out the latest shareholder reports for your funds and account statements for your stocks, and calculate how much you have in cash, bonds, and various types of stocks. What a job! No wonder people don't know what's in their portfolios.
Use Morningstar.com's Intstant X-Ray instead. Simply enter the tickers of all of your investments and how much you have invested in each, either in dollar or percentage terms. Then click "Show Instant X-Ray."
You'll discover your portfolio's asset mix, style-box breakdown, sector weightings, regional exposure, and much more. Then, for ongoing monitoring, just click to save your Instant X-Ray holdings as a Portfolio on Morningstar.com.
Continued: Make your portfolio fit your pattern
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