In today’s financial marketplace, a well-maintained portfolio is vital to any investor’s success. As an individual investor, you need to know how to determine an asset allocation that best conforms to your personal investment goals and risk tolerance. In other words, your portfolio should meet your future capital requirements and give you peace of mind while doing so. Investors can construct portfolios aligned to investment strategies by following a systematic approach.
Most investors know that with both regular contributions to their investment portfolio and the presumed compound interest of those investments, their portfolio will grow. However, an additional investment strategy equally important to the growth of all investment portfolios as urged by the financial experts, is the application of asset allocation and diversification.
Diversification is the process of varying your securities portfolio within asset classes. For instance, diversification in stocks would mean holding stocks in diverse sectors, such as energy, healthcare, industrial, and so on. In bonds it could mean having a variety of federal, state and municipal bonds. If properly diversified, your portfolio of stocks (and/or bonds) will ordinarily experience ups and downs at different times as various sectors fall in and out of favor with the economy and with investors.
We had a chance to chat with Mubarak Shah to get his take on how a layman investor should grow a portfolio. Mubarak Shah, Penny Stock Trader & Teacher, is the founder and owner of InPennyStock, one of the fastest-growing educational Penny Stock Trading community sites.
At InPennyStock, Mubarak teaches a diverse array of students, both advanced and new traders alike, about the most effective and profitable strategies for penny stock trading and goes into depth about the most up to date and successful trading methods of the current stock market trend.
Furthermore, Mubarak Shah, CPA of InPennyStock has also focused and transitioned into ICO (Initial Coin Offering) reviews, cryptocurrency trading, altcoin investing, and bitcoin / crypto technical analysis.
Mubarak creates video courses as a basis for new traders to learn the fundamental strategies of penny stock trading, all in one place.
Determining Your Appropriate Asset Allocation
Ascertaining your individual financial situation and goals is the first task in constructing a portfolio. Important items to consider are age and how much time you have to grow your investments, as well as the amount of capital to invest and future income needs. An unmarried, 22-year-old college graduate just beginning his or her career needs a different investment strategy than a 55-year-old married person expecting to help pay for a child’s college education and retire in the next decade.
Build in downside protection
Given the volatility in the markets, a smart income strategy in retirement planning should include cash for liquidity—and downside protection, Rob says. When investing after retirement, you can have cash available when you need it, reduce potential losses and still keep part of your portfolio focused on longer-term growth. Set aside one year’s worth of expenses, after accounting for other non-portfolio income sources, in a liquid cash account. This reserve is the money you need to supplement your regular income sources, such as Social Security or a pension.
Focus on income and potential for growth
With some protection in place, you can now consider investing the remainder of your portfolio in assets that have greater potential for investment income and growth, depending on your time horizon and risk tolerance.
Dividend-paying stocks are one option for the equity portion of a portfolio in retirement. While these stocks are not a substitute for bonds, you may want to integrate more dividend payers into your stock allocation if you’re aiming for a portfolio for income.
When choosing stocks for income, look beyond the current dividend rate, Rob advises. It pays to examine a company’s cash flow to see if it can continue to cover its dividend. Other factors to consider before buying an income stock include whether the company is selling any assets and how consistently it has offered its current yield over the past five years.