How to Build a Portfolio

Once you’ve decided to assemble a portfolio, the question is: where should your money go, and how much should you invest? There are at least three things you should consider: time horizon, risk tolerance, and diversification.

Before you start, ask yourself the following three questions:

1. How much time do you have before you need the money?

Generally speaking, the less time you have before you need the money, the less risk that you should put into your investments.

This is because high volatility investments, for example, growth stocks, are likely to lose value. It could take months or even years before they recover in value or gain value.

You could always adjust your portfolio as time approaches.

For example, if you won’t need the money in 10 or 20 years, you could put up an aggressive portfolio, mainly made up of growth stocks. This allows sufficient growth potential, as well as time for recovery.

As time goes by, you may want to change to a defensive portfolio just to be safe, buying mainly bonds and defensive stocks.

2. What is your risk tolerance level?

Your risk tolerance is measured as the amount that you can bear to lose.

If you’re constantly worried that your investment amount might shrink, a defensive portfolio might suit you well. However, if you’re ambitious and aim to earn a considerable profit, you might consider a growth or speculative portfolio.

You do, however, have the choice to allocate your money among different portfolios with different risk tolerance levels.

For example, you may put 80% of your money in a defensive portfolio and another 20% in a growth portfolio, or vice versa if you have a higher risk tolerance level.

3. How diversified is your investment?

As we’ve always been taught, “don’t put your eggs in one basket”. Diversification is the key to success in investing.

Diversification means spreading your money across different companies, sectors, and regions so that your portfolio won’t be entirely dependent on one particular asset.

To figure out if your planned portfolio will be diverse, write down what investments you have in mind and see if they’re centralized in one sector.

To build a diversified portfolio, you can buy stocks/ETFs or other assets in different sectors on your own. Or, you can simply invest in ETFs/mutual funds that are invested in multiple sectors.