3 Ways to Build a Portfolio You Won’t Lose Sleep For

LLet’s face it – investing can be a stressful prospect, especially when you’re relatively new to the game and not quite sure what you’re doing. But invest in stocks is one of the most effective ways to grow your wealth, so it’s worth stepping out of your comfort zone to do it.

Of course, your goal as an investor should be to build a portfolio you’re comfortable with — a portfolio that gives you the trust you have to sleep well at night. If you’re not there yet, here are some important guidelines to follow.

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1. Understand the basic rules of asset allocation

Stocks are a riskier proposition than bonds, but they also tend to offer much higher returns – returns you’ll need to build enough wealth to meet your long-term goals. As such, you shouldn’t be afraid of stocks. On the contrary, you need to ensure that you have an appropriate level of it in your portfolio.

Now, the extent to which you invest in stocks will largely depend on your personal risk tolerance, but your age should also be a factor. Generally, the closer you get to retirement, the less aggressive you need to be with stock ownership, whereas when you’re younger, betting heavily on stocks is a solid decision.

Want to fine-tune your stock allocation a little more precisely? If so, you can use the Rule of 110, which states that if you subtract your age from 110, you should have that percentage of your portfolio in stocks. A 60-year-old, for example, would be advised to have 50% of their assets in stocks under this formula, while a 30-year-old would be 80% invested in stocks.

Again, there is wiggle room here, and risk tolerance can and should come into play. But following this rule of thumb will help you build a portfolio with an appropriate level of stocks given of your age.

2. Stock up on index funds if individual stocks intimidate you

Buying individual stocks can be a daunting prospect. You need to research each company and make sure it matches your investment strategy.

A less stressful bet may be to fall back on the performance of the broader market, and you can do this by investing in index funds. Index funds are passively managed, low-fee funds that aim to match the performance of the stock market indices to which they are linked. A S&P500 An index fund, for example, will aim to do as well as the S&P 500 itself, which is an index made up of the 500 largest publicly traded companies.

When you buy index funds, your portfolio gains in value because the market is doing well. Of course, your portfolio will also lose value when the stock market accidentsbut that way you’ll know your investments aren’t outliers – they’re simply down because the broader market is down, and they’ll recover once the broader market recovers.

3. Diversify

Holding a diverse mix of investments in your portfolio can help you avoid losses during market downturns or periods of volatility. Now you can diversify by buying stocks from different corners of the market – for example, some technology stocks, some banking stocks, some energy stocks and some healthcare inventory – or you can go back to index funds, which can help you achieve the same goal without having to do so much research and make so many trades.

Now, if you go the single stock route, you should generally aim to own at least 12 different stocks across at least four market segments. If you buy 12 different tech stocksfor example, and tech stocks crash, your portfolio value will drop overnight, whereas if you only invest around 25% of your stock in tech stocks, the damage won’t be as great .

It’s important to invest, but it’s also important to feel secure in how you invest. These tips will help you build a portfolio that will be a source of comfort rather than panic.

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