A Balancing Act: 5 Steps for Creating a Sound Portfolio



By:  Joseph A. Caputo | Chief Information Officer & Associate Portfolio Manager

Creating a well-balanced, diverse portfolio of securities can be tricky. It requires time, discipline, and research. There are many factors to consider when developing an investment portfolio appropriate for your individual situation and circumstances.

FIRST, you will want to determine your investment risk tolerance. Are you comfortable with an aggressive portfolio with 100% of the portfolio in the stock market? Or would you feel more at ease with a less-risky blend of 65% stocks and 35% income securities? Whatever investment blend may be best for you, it is advisable to stick with your chosen model until something significant changes that alters your tolerance for risk.

SECOND, review the investment time horizon for your assets. Are the assets going to be used to buy a home in 3 years, fund a child’s college in 15 years, or supplement your income when you retire  in 25 years? These are extremely important parameters to set and understand. This will help you maintain a portfolio that matches your time-horizon. More importantly, it will help you rest assured that short-term market corrections, or intermediate-term market drops, will not prevent achievement of your long-term goals.

THIRD, you will want to set a reasonable schedule on which to rebalance your portfolio. Depending on your mix of investments, it may make sense to rebalance the first of the year, or semiannually. What is important here is that you avoid attempting to rebalance specifically at times you believe the market is going to change. At one time or another, some of us—even the smartest of investors—have attempted to “time the market.” On the surface, it sounds like a solid strategy: sell certain sectors when the market reaches its peak, and “buy back in” when the market has bottomed out. But what strategies do you use to anticipate these events? Do

you look at a chart of the S&P 500, retail sales figures, unemployment rate, or do you just go with a gut feeling? Market timing can be a dangerous game, and we do not believe it should play a part in your overall investment strategy. It’s best to stay on track with your scheduled rebalance dates and not try to time the market.

FOURTH, you will want to make sure you construct a well-diversified portfolio of securities. You should aim to gain exposure to several areas of the market and invest

across multiple asset classes. This may include foreign and domestic stocks, as well as foreign and domestic income securities. Perhaps you will want a portion invested in cash for liquidity as well. You should consider holding small, medium, and large companies in your portfolio.

Additionally, it is important to identify, short-, medium-, and long-term fixed income, while remembering to consider the credit risk of all of these securities.

FIFTH, it makes sense to identify funds with below average expense ratios so that the fund fees do not eat away at your performance over time. However, “cheaper” does not always mean better. In certain cases, a managed mutual fund with higher expenses could be a better fit in a portfolio than a low cost index exchange-traded  fund.

As you can see, many factors go into the construction of an investment portfolio.Understanding the delicate blend of  the many moving parts is important to long –term investment success. If you wish to hear more about how BWFA can help you manage your investments, please contact us at 410-461-3900.