10 Steps for a Successful Investment Portfolio

An investment portfolio is a tool used to help us reach our life goals. When constructed correctly, they allow us to go on vacations, pay for college for our children and grandchildren, retire comfortably and all the other kinds of objectives we strive for to give ourselves and our loved one’s better lives. For those out there that are the head of households and the family steward, getting your portfolio right is crucial to reach these goals. In this article, we'll outline 10 essential steps for creating a successful investment portfolio, providing examples and additional insights along the way.

Quick Facts:

● A successful investment portfolio requires careful planning and regular review.

● Diversification is key to minimizing risk and maximizing potential returns.

● Understanding your investment goals and risk tolerance is crucial.

● Regularly rebalancing your portfolio can help maintain a consistent allocation.

Step 1: Define Your Investment Goals and Consider Your Values

What do you want to achieve in life? Perhaps you would like to ensure your children’s education is paid for? Or maybe you would like to retire a bit early or purchase a new home. These targets determine the foundation of your investment portfolio. Knowing what you want to achieve will guide your investment decisions and help prioritize your assets accordingly.

Taking this a step further, it’s important to address your values, ethical standards in life and your investing mindset as they may be taken into account when constructing your portfolio. Each of our values vary greatly, but yours may include hard work, time with family or the environment. And, ethically, you may align with some assets more than others. Many people have stocks or other assets in their portfolios that they may be ethically opposed to and wish to not support. That’s why these are important considerations when building a successful investment portfolio.

Step 2: Determine Your Time Horizon and Assess Your Risk Tolerance

Time horizon and risk tolerance go hand in hand. Time horizon refers to the length of time you plan to hold your investments. Longer time horizons typically allow for greater investment risk and potential for higher returns, while shorter horizons require a more conservative approach.

Knowing your time horizon lets you get a clearer picture of your risk tolerance, allowing you to build a more successful investment portfolio. High-risk investments may provide higher returns, but they also come with increased volatility. A lower-risk approach may offer more stability but provide potentially lower returns. Factors such as your time horizon, age, income level and financial obligations are all considerations for portfolio construction.

For instance, it is generally advisable that older individuals reduce the risk in their portfolios as opposed to younger individuals who have more time to withstand market fluctuations. Periods of market volatility have the potential to cause great harm to the value of most portfolios, regardless of their allocation, but the historical trend of growth over time has always returned value to portfolios that stay invested.

Step 3: Develop an Asset Allocation Strategy and Diversify

An asset allocation strategy is the process of dividing your investments among different asset classes, such as stocks, bonds and cash equivalents. A well-diversified portfolio will help minimize risk while maximizing returns. For example, a 60/40 stock-bond portfolio might be appropriate for someone with a moderate risk tolerance and a medium time horizon. Of course, asset allocation and diversification cannot ensure a profit or protect against loss.

Step 4: Time In the Market Beats Timing the Market

Understanding the distinction between timing the market and time in the market is crucial to building a portfolio and reaching your objectives. The average annualized rate of return for the S&P 500 over the last 10 years is just over 12%.  In contrast, active traders tend to underperform indices by as much as 10% annually.

Historically, individual traders and those looking to time market swings have been less successful than those who simply invest and stay invested over time. What’s more, investors who get advice from an advisor or have financial planners performed over 3.3% higher than investors who managed their own portfolios.

If your objective is to purchase a home or to have enough to retire comfortably, trying to time a market by buying and selling peaks and troughs can be detrimental to your progress. Whereas, had this money stayed invested with the ability to compound, its growth would likely far outweigh a well-timed exit or entrance over time, and the value of professional advice should not be discounted.

Step 5: Monitor Your Portfolio Regularly and Continuously Rebalance

Regular monitoring of your portfolio helps ensure that it remains aligned with your goals and risk tolerance. Rebalancing may be necessary to maintain consistent allocation over time. For example, if the value of your bonds grows faster than your stocks, you might rebalance by selling some of your bonds and using the proceeds to buy more stocks.

Step 6: Ensure You Have the Right Tax Location

Taxes can significantly impact your investment returns. One key aspect to ensuring your portfolio is optimized to reduce taxes is your tax location. Tax location refers to the account types in which you place certain assets. Some assets have returns that are non-taxable, and therefore should not be placed in accounts that are tax-deferred, such as IRAs and 401(k)s.

For example, corporate bonds have taxable returns. Therefore, it is more efficient to place such assets in accounts like IRAs to reduce their tax burden. In contrast, municipal bonds are federally tax-free, and do not need to be housed within a tax-advantaged account. Other things to consider when determining optimal tax location are the short-term gain tax rate versus long term, as well as the frequency of trades you make to assets like stocks.

Step 7: Make Sure You Harvest Losses

Another significant aspect of tax efficiency is tax-loss harvesting. One of the largest burdens to a successful portfolio is capital gains tax. Tax-loss harvesting is the process of selling certain securities in your portfolio that are at a loss, allowing you to reduce the capital gains tax on other securities that are currently valued above your purchase price. For example, let’s say stock A has increased in value and stock B is currently at a loss. The sale of stock B can offset the capital gain tax that would occur should you sell stock A.  

There are considerable opportunities to reduce your tax burden with this method, especially with larger, diversified portfolios. Effective tax-loss harvesting has been shown to yield as much as 1.10%, which, over time, can dramatically increase the performance of your portfolio.

Step 8: Stay Informed and Educated

The world of finance is constantly changing, so it's essential to stay informed about market trends, new investment vehicles and regulatory changes. Continuing education can help you make informed decisions for your portfolio. For example, attending seminars or webinars on investing and finance can provide valuable insights and help you make more informed decisions.

Step 9: Do Not Make Emotional Decisions

Perhaps the most detrimental factor to anyone’s portfolio is the emotional connection we have with our money. After all, we all spend so much of our time and energy earning to provide for ourselves and our families. So, when you see your portfolio drop by 10-20%, you likely have an adverse reaction and bias that causes you to make rash decisions.

So, much like understanding the time in the market vs. timing the market, it’s crucial to avoid making emotional decisions about our money in times of volatility.

Step 10: Seek Professional Advice

Personal finances can become complicated and potentially unmanageable while maintaining a family and a job, especially through times of market turmoil. Advisors can help to ensure your portfolio is totally aligned with your needs and goals, and let you focus on what matters most to you.

Bottom Line

Building a successful investment portfolio requires careful planning, regular review and a deep understanding of your unique financial situation. By following these steps, you can create a portfolio that helps you achieve financial success and peace of mind for years to come. If these steps still seem daunting, your financial situation may require the help of professionals. At Conway Wealth, we know going at it alone is not an easy feat.

For more information on finding the right financial advisor that can address your unique needs, feel free to reach out directly to the Conway Wealth team by emailing info@conwaywealthgroup.com or calling 973.285.3640.

Investment advisory and financial planning services offered through Summit Financial, LLC, an SEC Registered Investment Adviser, doing business as Conway Wealth Group (4 Campus Drive, Parsippany NJ 07054. Tel.973-285-3600). 7237093.1

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