When it comes to an investment portfolio, one size does not fit all. Like many things in life, your investment portfolio should be customized to meet your particular needs.
A good place to begin is determining your desired asset allocation – the relative proportion of equities, cash, and fixed-income investments you want to hold. Although asset allocation does not guarantee a profit or protect against a loss in a declining market, it is extremely important. As described in a report in Financial Analysts Journal by researchers Gary P. Brinson, Brian Singer and Gilbert Breebower, asset allocation typically accounts for more than 90 per cent of your portfolio’s long-term performance.
Your portfolio could, for example, consist of approximately 80 per cent equities, reflecting an emphasis on higher growth and rising income potential. Of course, over time, it will likely come with higher risks than portfolios with a more income-oriented objective. At the other end of the spectrum is a portfolio with, for instance, only 20 per cent equities. This would emphasize current income with little growth potential or inflation protection, but over the long term, it should have lower risk than portfolios with more of a growth-oriented objective.
The challenge is to select a mix of assets that’s just right for you. You need to think carefully about a number of factors, especially your stage of life. If you’re in your early twenties and just starting your first job, you’ll likely be primarily focused on growth, and therefore equities. If you’re in your later retirement years, you’ll probably have more of an orientation toward income, with less of an emphasis on equities.
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Once you’ve identified your asset allocation, you need to select the right combination of specific investments. For example, within the equities portion of your portfolio, there’s a wide range of choice on what you can hold, from aggressive
growth-oriented stocks and mutual funds to those stocks that pay dividends and are
typically characterized by lower-growth and less volatility. Similarly, there are various
possibilities for your fixed income component. For instance, a Guaranteed Investment Certificate (GIC) typically comes with less risk than a corporate bond, but it also likely means a smaller return.
One other point to keep in mind is that your work does not end once you determine all of your holdings. Investing is a process of ongoing monitoring and review.
Your personal circumstances – and therefore financial requirements – change over time. And so does the market. You’ll have to adjust your portfolio accordingly when these types of changes happen.
Most important of all – whether it’s establishing your asset allocation, selecting individual investments, or deciding on when to make changes – it’s best not to make these types of decisions alone. Make sure you seek the help of a financial advisor in establishing and managing your portfolio.
Deborah Leahy is an Investment Advisor with Edward Jones, Member Canadian Investor Protection Fund.