A part of saving is having a savings strategy, this means that we need to create an investment portfolio. As young adults we need to start saving for our future goals such as buying a home and saving for retirement; and we need to create an investment portfolio that is designed for each individual goal. The investment portfolio for a long term goal such as our retirement in 35 years will be a lot different than the investment portfolio for a short term goal such as buying a house in 5 years.
Here are the 5 Steps to help create your first investment portfolio:
Set Your Goal. Having a defined goal will help determine what types of investments you need to create your investment portfolio. Short term investment portfolios will have lower risk investments such as fixed income mutual funds, bonds, and GICs. Long term investment portfolios will have higher risk investments such as Stocks and Exchange Traded Funds.
Determine Your Level of Risk. When you create your investment portfolio you will need to know how comfortable you are with fluctuations in the value of your portfolio. High risk investments could bring large profits over the long term; however they could also bring losses to your investment portfolio in the short term. You must ask yourself…am I willing to lose some of my money in the short term to potentially gain profits in the long term?
Find Out What Type of Investor You Are. Before you buy investments to create your investment portfolio you will need to determine your investment priority. This can be done by answering a few simple questions commonly known as your Investor Profile or the Know Your Client (KYC) questionnaire. If your investment priority is capital security and not capital growth then you may be a conservative investor. However, if your investment priority is capital growth over the long term then you may be an aggressive growth investor. Keep in mind that you can’t have a lot of potential growth with capital security; you can only pick one as your investment priority.
Diversify Your Investment Portfolio. We should never put all of our eggs into one basket. Therefore, it is a good investment strategy to have a variety of investment options when we create our investment portfolio. Diversifying your investment portfolio means investing in different asset classes such as cash investments, fixed income, foreign income, local equity, foreign equity, as well as different sectors investments. In general an investment portfolio of under $10,000 should have 3 different investment options (such as Mutual Funds), and an investment portfolio of $25,000 should have 4-5 different investment options. If you’re a Canadian resident, you’re going to want to look into Canadian dividend stocks.
Do Your Research. Before you buy investments and create your investment portfolio please research the investments that you want to buy. When you are looking at information on investments please remember that past performance is not an indication of the future.