Cartera de valores

Una cartera de inversiones o cartera de valores es una determinada combinacin de activos financieros en los
cuales se invierte. Una cartera de inversiones puede estar compuesta por una combinacin de algunos
instrumentos de renta fija y renta variable.
Los instrumentos de renta fija aseguran un retorno fijo al momento de invertir, pero normalmente con
una rentabilidad menor a la de uno de renta variable, que no asegura un retorno inicial pero puede ofrecer
retornos ms altos.
La renta fija histricamente ha tenido menores ratios de rentabilidad que otro tipo de activos considerados de
mayor riesgo (acciones, materias primas, etc.), de todas formas la renta fija tambin est sujeta a variaciones
de rentabilidad dependiendo de situacin macroeconmica, de pases, de quiebra o impago, de plazos a corto,
medio o largo plazo, estatal o de empresas. La mayora de opiniones de gestores de carteras coincide en no
invertir ms de un 20 o 25% en un slo fondo de inversin por muy bueno que creamos que sea.
Diversos estudios de diversificacin de riesgo de carteras coinciden en afirmar que se debe tener un mnimo de
5 6 fondos de inversin diferentes (Renta Variable, Renta Fija, Mixtos, Gestin alternativa, Divisas, materias
primas,) y un mximo de 10 12 (cuidando de no solapar los activos de los mismos). Los activos se
diversificaran tambin segn zona geogrfica: USA, Europa, Global, Pases emergentes, fondos sectoriales
(no se aconseja invertir ms de un 5% en este tipo de activos).
Dependiendo del tipo de inversor que se sea, conservador, de crecimiento,agresivo, la ponderacin de los
diferentes activos ser diferente. En esto influye muchsimo tambin el plazo temporal, no se recomienda invertir
un porcentaje amplio de la cartera en Renta Variable si no se tiene un plazo temporal superior a 5 aos de
inversin (salvo que se prctique el trading: basado en el anlisis tcnico de soportes y resistencias, aconsejable
slo para inversores profesionales con preparacin suficiente).
Los buenos fondos de inversin se han considerado como una forma de ahorro ms segura que la adquisicin
de acciones por los partcipes individuales minoristas (permiten por mucho menos dinero tener mayor nmero
de acciones en cartera y adems gestionadas por profesionales del sector, adems de ventajas fiscales que no
tendran las acciones como puede ser traspasar un fondo a otro si pasar por hacienda, no as las acciones que
al venderlas tributaran las ganancias, por lo que a largo plazo tienen mayor rendimiento fiscal los fondos).
Dentro de los diferentes fondos de inversin aparte de la diversificacin por zona geogrfica tambin se puede
diversificar por estilo de inversin (estilo valor, estilo blend - mezcla de valor y growth - en RV, y growth o de
crecimiento), y por tipo de compaas pequeas, medianas y grandes. En renta fija hay tambin diversos tipos
de fondos de inversin: de corto plazo, de medio y largo plazo temporal, RF Corporativa (de empresas), High
Yield o de alto rendimiento (compaas con menor calificaciones crediticias) de mayores rendimientos pero
tambin de mayores riesgos.
Entre las diferentes divisas se encuentran el Euro, dlar EE.UU., yen, Franco suizo, Corona danesa, Corona
noruega, Dlar Canadiense, Dlar australiano, remimbi o yuan chino, etc. El mercado de divisas se considera
de los ms difciles e impredecibles. Por ello segn expertos aconsejan solamente tener un pequeo porcentaje
de su cartera en otra divisa de donde viva y desarrolle su actividad el inversor (no ms de un 15 20% en otra
divisa).
Si se invierte como parte de la diversificacin de cartera en un depsito a plazo fijo bancario mirar la legislacin
especfica del pas en cuestin (por ejemplo en Espaa el Fondo de Garanta de Depsitos (FGD) solamente
cubrira un mximo de 100.000 euros por titular y cuenta bancaria). Si se compra una propiedad inmobiliaria
mirar que cargas de hipoteca y otras tiene, si tiene usufructuario o si tiene un inquilino de arrendamiento por
ejemplo. Es bueno y conveniente se tenga siempre en cartera una parte de cash o liquidez (bien sea por gastos
imprevistos o para aprovechar oportunidades de inversin). Cuanto ms caros se compran diferentes tipos de
activos mayor riesgo sistmico se est corriendo (salvo que llevemos estrategia de trading a corto plazo: pero
esto es ms adecuado para inversores profesionales y no todos).
Cartera de valores vs. Fondos de inversin
Es frecuente entre los inversores la disyuntiva de si invertir en una cartera de valores o en un fondo de inversin.
Entre las ventajas de la primera se encuentran la percepcin de una renta peridica gracias a los dividendos
que pagan las acciones que forman la cartera, las comisiones ms bajas, el efecto "manada" de los gestores
de fondos, y una mayor libertad de accin para el inversor. Por contra, se advierten tambin algunas ventajas
en los fondos: menor necesidad de conocimientos, fiscalidad ms favorable, y menor trabajo para el inversor (el
gestor del fondo se ocupa de todo).1 2
INVESTMENT PORTFOLIO

In finance, a portfolio is a collection of investments held by an investment company, hedge fund,

financial institution or individual.[1]
The term portfolio refers to any combination of financial risk such as stocks, bonds and cash.
Portfolios may be held by individual investors and/or managed by financial professionals, hedge
funds, banks and other financial institutions. It is a generally accepted principle that a portfolio is
designed according to the investor's risk tolerance, time frame and investment objectives.
The monetary value of each asset may influence the risk/reward ratio of the portfolio and is
referred to as the asset allocation of the portfolio.[1] When determining a proper asset allocation
one aims at maximizing the expected return and minimizing the risk. This is an example of
a multi-objective optimization problem: more "efficient solutions" are available and the preferred
solution must be selected by considering a tradeoff between risk and return. In particular, a
portfolio A is dominated by another portfolio A' if A' has a greater expected gain and a lesser risk
than A. If no portfolio dominates A, A is a Pareto-optimal portfolio. The set of Pareto-optimal
returns and risks is called the Pareto Efficient Frontier for the Markowitz Portfolio selection
problem.[2] Recently, an alternative approach to portfolio diversification has been suggested in
the literature that is based on maximizing the risk adjusted return. [3]
Description[edit]
There are many types of portfolios including the market portfolio and the zero-investment
portfolio.[4] A portfolio's asset allocation may be managed utilizing any of the following investment
approaches and principles: equal weighting, capitalization-weighting, price-weighting, risk parity,
the capital asset pricing model, arbitrage pricing theory, the Jensen Index, the Treynor ratio,
the Sharpe diagonal (or index) model, the value at risk model, modern portfolio theory and
others.
There are several methods for calculating portfolio returns and performance. One traditional
method is using quarterly or monthly money-weighted returns, however the true time-weighted
method is a method preferred by many investors in financial markets.[5] There are also several
models for measuring the performance attribution of a portfolio's returns when compared to an
index or benchmark, partly viewed as investment strategy. On freelancing websites Portfolio is
considered as the past work which you had done or past shares which you have in any company.

Pool of different investments by which an investor bets to make a profit (or income) while aiming
to preserve the invested (principal) amount. These investments are chosen generally on the
basis of different risk-reward combinations: from 'low risk, low yield' (gilt edged) to 'high risk, high
yield' (junk bonds) ones; or different types of income streams: steady but fixed, or variable but
with a potential for growth.

Read more: http://www.businessdictionary.com/definition/investment-portfolio.html

Investment Portfolio Definition

An investment portfolio is a collection of assets owned by an individual or by an
institution.
An investor's portfolio can include real estate and so-called "hard" assets, such as gold
bars. But most investment portfolios, particularly portfolios that are assembled to pay for
a retirement, are made up mainly of securities, such as stocks, bonds, mutual funds,
money market funds and exchange traded funds.
The best retirement portfolios diversify the mix of investments -- which can range from
the caution of US Treasury bonds to the risky zip of small-company stocks -- in an effort
to dampen market losses and maximize potential gains.
Building a
portfolio: an
investment guide
If youre looking to get a better return from your money than you
can from a bank account, start here.
If youre looking to get a better return from your money than
you can from a bank account, start here.
An investment portfolio is simply where you keep your money. If
all your money is held as cash in your bank account, thats your
portfolio.
But its not a smart investment portfolio. The interest you earn on
the cash will probably be below the inflation rate, so the value of
your money will decrease over time. For example, if your current
account offers zero interest and inflation is 2 per cent, every year
your money will lose 2 per cent of its value in real terms.
Instead, experts advise that you spread your money around a few
different types of investment.
The basics asset allocation
Note that it should be different types of investment. Putting
everything into the stock market, even across a few different
company shares, can be as risky as putting everything into the
bank account. Similarly, just buying UK government bonds may
not be wise.
This is why investment professionals consider diversification to
be one of the golden rules of building a portfolio. It means
splitting your money across different types of investment
known as asset classes.
Aside from cash, the two asset classes of most interest to investors
are equities (stocks and shares) and fixed income(bonds). Both
have their advantages and disadvantages.
Based on historical trends going back over a century, youd
expect equities to rise more in value over the long term. After all,
equities represent a tiny share in a company. If the company is
successful in growing its profits, more investors will want to buy
its shares, driving the price upwards.
But they are more risky. If a company does worse than the market
expects, your shares can fall dramatically in value. You can limit
this risk by investing in massive companies, like supermarkets,
banks or utility firms, but even here you can still lose a surprising
amount: an investor who put 100 into Royal Bank of Scotland
shares in 2007 would, five years later, have been left with less
than 10.
Bonds are safer. You buy debt, for example debt issued by a
government, and the country pays you back over a set period
(hence fixed income) so that you get back more than you put in.
Governments do, of course, go bust. But it happens very rarely.
The downside with bonds is that you stand to gain less than with
equities.
For example, 1,000 invested only in bonds in 1956 would have
grown to 56,060 by 2008. But the same amount invested in
equities would have left you with 362,740.
But before you put all your money into equities, remember that
theyre much riskier than bonds. If you looked at line charts of
equity returns and bond returns since 1956, the line on the equities
chart would have much bigger swings, up or down, than the bond
chart. The measure of how big and how frequent these swings are
is called volatility. Equities are much more volatile than bonds.
You might get back more than you invested if you wait long
enough, but theres a much bigger chance that when you want to
sell, youll have to sell at a loss.
So thats the basic dilemma: slow and steady bonds, or racier and
riskier equities. The answer is normally a bit of both, with some
cash thrown in for emergencies. But what balance should you
strike?
What suits you
The best place to start is with you. Ask yourself why youre
building a portfolio. For most of us, the central task is to build a
pot of money that involves you, the investor, taking some risk
over the long term, at the end of which ideally you will have built
up a sizeable portfolio of diversified assets that will last you
through to your twilight years.
Some investors dont have such a long-term objective and are thus
less willing to take on risks. They might for instance only be
saving for ten years to cover school fees. Alternatively, they may
already be in retirement and need to generate an income while
preserving their money against inflation, even at the cost of future
opportunity. For both of these latter groups, a sensible investment
strategy is likely to involve a relatively low level of risky assets
such as equities.
So every investor is unique, but everyone faces the same trade-
off between risk and reward.
In simple terms, you cant hope for long-term above-average
returns unless you are willing to take on more risk. This might
sound like a simple idea but an astonishingly large number of
investors persist in the myth that double-digit year-on-year
growth is possible without risking the loss of a substantial chunk
of their assets.
Talk to any sensible economist and theyll tell you that investing
in equities is only a viable option for the long term, by which they
mean at least five years, if not ten.
Theyll also tell you that if capital preservation (avoiding
losses) is your primary objective, you should probably steer clear
of stocks and shares, and stick to less risky, less exciting assets
such as bonds and cash.
If youre saving for the long term, then put more into equities. But
if youre already retired, favour bonds.
How to diversify
The next key idea is diversification. In the broadest sense, there
is one bucket of assets in which you might find risky things such
as equities, commodities and all manner of alternative
investments including commercial property. The other bucket
consists of less risky assets such as bonds (government or
corporate) and cash. Remember that assets in this latter bucket are
absolutely not risk free: bonds in particular can rise and fall in
price while the value of cash can be eroded by inflation.
These two buckets of assets are defined by their risk levels and
your job (or that of your adviser) is to match up your personal
objectives and tolerances to a mixture of diversified holdings.
This might end up looking like a 40/60 blend of low-risk/high-
risk assets or any other combination based on your tolerance of
risk.
If you are especially risk friendly and have a long time horizon,
you might be willing to put 100 per cent of your portfolio into
risky assets, whereas if capital preservation is the name of the
game, you might stick with 100 per cent low-risk assets.
Growing your assets as you grow
Crucially, you need to understand that as you grow older and your
requirements change (as well as your perceptions of risk) your
portfolio of assets must also adapt.
To give you an idea of how your portfolio might change, lifecycle
or lifestyle funds have been developed. These funds mix equities,
bonds and property assets in different proportions according to
how close the holders are to retirement (or how far beyond it).
Simply put, they start with 100 per cent of assets in risky equities
for a worker in his or her thirties, then end with a portfolio where
75 per cent is allocated to low-risk bonds for an investor into his
or her retirement.
This is known in the investment industry as lifestyling. Its a
fancy term for a very old rule of thumb: subtract your age from
100 and thats how much you should have in equities. So if youre
30, have 70 per cent of your investment portfolio in equities. If
youre 60, have 40 per cent in stocks and shares.
Buy and hold
It is vitally important that any rearrangement of your portfolio is
controlled and measured. Never forget that every time you buy
and sell assets, some of your money is lost in fees.
Virtually every analysis of historical returns suggests that
investors shouldnt over-trade, shouldnt try to time the markets,
and absolutely should avoid turning into speculators.
Instead, the consensus is that private investors should work out a
long-term strategy, build a diversified, robust portfolio and then
sit tight as a buy-and-hold investor.
Research shows that the most active traders (averaging over 250
per cent portfolio turnover annually) earned 7 per cent less per
year than buy-and-hold investors, who averaged just 2 per cent
portfolio turnover.
Its simple. Every time you trade and change your asset
allocations based on a hunch, youll incur transaction and
advisory charges.
Say you have a 50,000 savings pot and achieve an annual
investment return of 8 per cent per annum. An extra 1 per cent per
annum in trading charges results in a reduction in returns over 30
years of more than 100,000 twice the present value of the
portfolio.
There is a world of difference between being an investor
buying assets and sticking with them for the long term and being
a trader trying to profit from short-term price movements. The
former strategy is endorsed by the worlds most famous and
successful money managers, from Warren Buffett and Benjamin
Graham in the US to Neil Woodford and Anthony Bolton in the
UK.
Portfolios: the bottom line
The basics of building an investment portfolio are surprisingly
simple. Work out your own investing style and then make sure
that your diversified mixture of asset classes mirrors your own
risk-reward trade off.
If youre willing to embrace higher risk levels and wont need the
money for a while, think about tilting your portfolio towards
shares. If you only have a narrow time horizon for what you want
to achieve from your investment, give more weight to bonds and
cash.
And dont get too carried away: keep the underlying funds within
your portfolio simple and cheap, and dont over-trade.
How To Build An Investment
Portfolio: Eight Essentials
By Randy Warren and Robert McCarty, Warren Financial
Investing isnt a game, nor is it for the faint of heart. Markets go up and, much
as the laws of physics govern the arc of a golf ball, historical trends prove that
markets will also come down. There is no such thing as achieving perfect
performance through market timing or by only picking winners. However,
you can certainly build a solid portfolio that allows you to succeed and
(generally) avoid the stress and worry that can go along with market volatility.
Here are eight considerations to keep in mind.
Commit to your purpose. Why do you want to invest? Your purpose is very personal.
It could be to help your kids/ grandkids with education costs. It might be to travel and
enjoy a comfortable and worry-free retirement. Perhaps the reason is to support a
faith-based effort or some other philanthropic interest. It could be to launch a new
career, or your own business. Or maybe you want to buy a vacation home that will
allow you to surround yourself with family and friends and enjoy the good life that
everyone around is working so hard to achieve. Most likely, the why is some or all
of the above. If you know what you want to accomplish, you have a good idea of not
just where you are heading, but what it would take to get there.
Understand your starting place, and be realistic about your appetite for risk.
Most of us know how much we have saved to date. Some of us have an inkling of
what we spend today and how much we will need for the next stage of our lives. Very
few of us have a realistic understanding of how much risk were willing to take on to
achieve our financial goals. Consider that second home perhaps it will cost between
$800,000 and $1 million. Because you really want that house, you may try to convince
yourself that youre very comfortable with moderate-to-high risk and volatility in your
portfolio. In reality though, the slightest tremor in the markets causes you to lose sleep
(and hair) so perhaps youre not being fully realistic in your assessment of your risk
tolerance. IF you can deal with the hair loss, fine. If not, adjust your goal and/or
timeframe.
Invest with an end in mind. This is directly related to consideration #1. You know
your purpose for investing, but do you know what it will cost to achieve that purpose?
You have to have a fairly solid understanding of the amount of money your purpose
will require. As the wise baseball philosopher, Yogi Berra, said, If you dont know
where youre going, youll miss it every time.
Invest with a plan. The most successful portfolios are not thrown together
haphazardly. They are assembled based on a solid understanding of the fundamentals
of the individual securities that comprise the portfolio. A solid portfolio is diversified
not just across investment vehicles and exchanges, but also with an eye toward sectors
and/or geographic regions that are expected to perform well. The portfolio should also
factor risk tolerance into the balancing discussion.
Think quality over quantity. Structuring a portfolio that delivers solid, long-term
results means that the underlying fundamentals of your holdings are critically
important. While the latest IPO-of-the-moment may appear to offer an exceptional
return in the short term, an offering that isnt supported by strong fundamentals may
actually stumble out of the gate.
Give it time. This is critical because it requires you to link all of the ideas noted above
to build a solid portfolio. Building your portfolio by identifying your purpose, what
you need to achieve that purpose and your risk tolerance, and basing it all on solid
fundamentals, is a proven approach that doesnt lend well to in-and-out, market-
timing types of investing approaches. While there may be some investment choices
that you hold for shorter periods of time than others, overall, maintaining the long
view should deliver consistently positive returns.
Dont obsess about the day-to-day. Markets can be volatile from day to day, even
month-to-month, never mind hour-to-hour. But over longer periods of time, volatility
subsides. Build your portfolio and let it run. Checking the market every 15 minutes or
so wont affect your portfolio, but it will affect your sanity.
Stay focused on what you can control. Which is really just your individual approach
and mindset. You cant control the markets, the companies that youre invested in, the
political climate, the weather really anything except your commitment to your
strategy. Determine your strategy on your own or with a financial advisor, and stick
with it.
Specific Investment strategies and picks. Given the long term low rate
environment which has persisted now for several years, post Great Recession,
several mega trends appear on the horizon.
The first mega-trend involves distinguishing between leverage fueled
investments vs higher quality investments i.e., whether the debt play is tied
to countries, sectors, or demographics. For example, debt deleveraging
continues in Greece, Russia, China, Brazil, and other more volatile regions.
Debt deleveraging has already concluded here in the US and the more stable
countries in Europe. Stick with these markets for now (consider SPY, SDY,
EWL DXJ, EWG, dont consider FXI).
The second mega-trend involves the rising interest rate marketplace here in
the U.S. Some sectors of the US economy will benefit from rising rates,
including banking and health care. Others will not fare as well in a rising rate
environment e.g., macro-cap international companies such as industrials.
Rising rates in the US may make the dollar even stronger than it is today,
which will impact larger US companies with significant overseas operations.
And emerging markets always struggle when the US raises interest rates.
(Consider BAC, C, WFG, KRE, VHT, IBB, dont consider PIN, IDX, EWM,
EWH, FXI, TUR, EWZ, RBL)
The third mega-trend involves downward-trending commodity prices,
especially oil. As oil falls, companies in the transportation sector should
continue to fare well, particularly airlines (finally). (Consider AAL, ALGT,
LUV, DAL, ALK, XTN, dont consider OIH, XLE, USO)

If you have Rs 1 million to spare,

here are 5 portfolio options to
generate wealth
If you want your money to work for you first thing is to get it out of your
bank account and invest in various asset classes.
Kshitij Anand
Moneycontrol News
I can't invest because the market is trading at high valuation? There is too much
risk in the market right now? I don't know how much and where to invest? Do
these questions look familiar to you?
If yes, then we might be able to help you out. If you want your money to work for
you first thing is to get it out of your bank account and invest in various asset
classes.
The best returns are achieved through patience and by putting your eggs in few
baskets that you know well and watch them growing over a period of time.
Unlike the year 2016, 2017 turned out to be a rewarding year for investors so far,
as market touched its peak earlier in the month of April thanks to abundance
liquidity, positive global and domestic cues.
The Nifty registered a record high of 9,273.90 while the S&P BSE Sensex touched
a fresh 52-week high of 30,007.48 earlier this month.
The equity markets are near record highs only in nominal index terms. With Sensex
and Nifty PE at about 23x they are expensive, but below the valuations of the
previous 2008 high of about 29x PE, 2001 peak PE of about 30x and much below
the 1992 and 1994 PEs of over 50x, suggest experts.
The debt markets are also much higher than lows of 2 3 years ago with the 10-
year G-Sec yield about 2.5-3 percent lower than its high. It is still far from the
highest price, or lowest yield.
Movement of markets about 20 percent higher than these levels would take them
to near bubble levels, unless fundamentals improve. Bubbles can grow to
ridiculously big sizes, as history has repeatedly demonstrated, Anil Rego, CEO
& Founder of Right Horizons Investment Advisory Services told
Moneycontrol.com.
The fundamentals to watch would be corporate earnings for equities and lower
borrowing by the government. A very sharp improvement in either is not likely
with Q4 corporate earnings likely to reflect demonetisation impact, he said.
Assuming you are in the age bracket of 30-35 years with Rs 10 lakh to spare can
consider these 5 portfolio options.
Portfolio 1 - Risk-taking investors
Diversification is key when you want to build your portfolio and staggered
approach should be adopted, Abhimanyu Sofat, VP, Research, IIFL told
Moneycontrol.com. He said investors can look at investing 70 percent in equities,
20 percent in debt and the rest in gold.
Portfolio 2 Safe approach
A reasonably safe allocation at this time, attempting to enjoy any upside of both
equity and debt markets would be to invest 25 percent each of the corpus in equity
growth schemes of mutual funds and dynamic bond funds, said Rego of Right
Horizons Investment Advisory Services.
The other 50 percent would be in Liquid Plus Funds with STP over 2 years into
midcap equity funds. The allocation considers the youth of the investor, some
ability to take risks while striving to better normal returns for long-term objectives
such as buying a home, or building a retirement corpus, he said.
Portfolio 3 Invest with retirement in mind
Since the risk taking abilities are higher, Rego said, one can invest upto 60 percent
of investments in equities (via Equity funds and stocks route).
An ideal allocation would be 60-65 percent equity, 25-30 percent in equity and rest
10-15 percent in gold. This allocation would help in a balanced manner for
investing in building a sizable retirement corpus.
Portfolio 4 Stock approach
One should focus your time and money in finding some of the biggest winners in
the markets. These stocks should come from top industry groups, have fastest
earnings and sales growth rates, produce cutting-edge products or services, and
enjoy good profit margins and strong management.
In the current scenario, focus 80 percent of your portfolio in equities and balance
in liquid funds to meet emergency requirements, Vijay Singhania, Founder-
Director, Trade Smart Online told Moneycontrol.com.
People with Rs 10 lakh (or Rs one million) idle should buy only four or five
stocks. It's always better to invest in the market by taking the staggered approach.
One should invest on days when markets are weak, he said.
The portfolio should be allocated as per the market cap of these stocks selected.
The idea is that investors should be able to limit losses and maximise gains by
keeping tabs on just a few stocks.
In a market correction, it's important to follow strict sell rules and sell any stock
that falls 8 per cent below its buy point, since you don't know when -- or if -- the
stock will recover.
Portfolio 5: Investing via STPs:
From the short-term perspective, the time of easy money making is over. Next one
year is likely to give only modest returns, certainly not spectacular returns. Also,
there is the possibility of no returns, if the investors time horizon is 1 year.
Bulk investment is not desirable at this juncture. The ideal investment strategy
for someone who has Rs 10 lakh, presently, is investing through Systematic
Transfer Plans (STPs), V K Vijayakumar, Chief Investment Strategist, Geojit
Financial Services told Moneycontrol.com.
Invest in a liquid fund and systematically transfer, say, Rs 10,000 each every
month to three funds - one balanced fund, one large cap fund, and one flexi cap
fund. This will give the investor the benefits of SIP as well as interest income from
the liquid fund, he said.
The advantage of this STP strategy is that if the markets correct and valuations
become attractive, STPs can be stopped and bulk investments can be made either
in attractively priced stocks or in equity funds.
How to Create an
Investment Portfolio
Picking stocks may be more fun than divining "asset allocation," the percentage of
stocks, bonds and other types of investments that you own, but studies show that a
balanced portfolio can have a bigger impact on long-term performance than
individual stock picking.
The good news: if you follow a few basic rules, asset allocation can be smoother and
less time consuming than scouring for the next Apple or Google.
Consider your goals. Knowing when you will need the money how much and how
soon should help you get started.
Time cures. When you're saving for a long-term goal, time can smooth the returns
of volatile investments. Volatility, which refers to the swings of an asset, is great
when your holdings are going up and scary on the way down. A long-term
perspective helps when you own more volatile assets, such as small-cap stocks or
commodities.
Except when it doesn't. If you're saving for a short-term goal, like a teenager's
college education, risky, volatile investments may work against you, plummeting
right before you need the money.
Watch out for inflation. Retirees or anyone living on a fixed income needs to worry
about the damage that inflation can inflict on both buying power and regular
payments, from bonds, for example, or annuities. Owning commodities, Treasury
Inflation Protected Securities (TIPS), as well as a healthy dose of stocks, can help
moderate inflation.
Be honest about your risk tolerance.
Investing involves risk. All investments involve some risk, even seemingly "safe"
investments like blue chip stocks or Treasury bonds. If you need some money for a
short-term goal and you cannot afford to lose a penny of it, put it into an FDIC-insured
product such as a savings account or a certificate of deposit.
No pain, no gain. Riskier assetssuch as small-cap or emerging markets stocks
tend to have greater returns over time, but can also have violent swings. For example
in 2008, emerging market stocks fell 53% percent and clocked in at 79% gain in
2009.
The rule abides. You may have heard one of several adages about how to mitigate
risk in an investment portfolio. They all amount to a quick fix for determining how
much of your portfolio to hold in less risky assets, bonds for the most part. Some say
to hold your age in bonds (40 years old = 40% bonds); other say 125 less your age
in stocks (85=85% in stocks.) As you can see from this example, some rules of
thumb are too far apart to even wrestle. The lesson here, though, is to have some
starting point for dividing your riskiest holdings (stocks) from your less risky (bonds).
You can view the historical returns of stock/bond splits here.
Go beyond stocks and bonds.
Invest in more asset types. One way to reduce the volatility of a portfolio is to add
some alternative assets like commodities or real estate, which don't generally track
the markets for stocks and bonds. Commodities can also counteract inflation,
because their prices typically rise when inflation picks up. If you're risk averse then
consider putting a small portion of your portfolio in a market-neutral fund, which aims
to make a profit in both bull and bear markets.
Know what you own. Just because their values aren't updated quarterly in your
brokerage statement doesn't mean that collectibles, houses, art and other valuables
aren't actually part of your investment portfolio. While such items aren't often quickly
sold, they do have value and risk to consider before you expand your holdings in
other directions.
What not to do when putting together an investment portfolio. Many investors make
one or more of these common asset allocation mistakes:
Don't follow fads. Focusing on fads can get you in trouble. Chances are an
investment fad has already produced high returns before you heard about.
Don't be satisfied. Taking the "set-it-and-forget-it" mentality too far can be costly. If
you don't review your portfolio regularly (annually, quarterly or monthly, just decide)
then you could wind up with an asset allocation that is vastly different from what you
set out with.
Don't lose money. It can take years to make up for a huge setback in your portfolio,
so don't ignore assets that hold up in all marketssuch as dividend-paying stocks,
short-term bonds or cash.
For more reading: The Securities and Exchange Commission has an in-depth
guide to asset allocation for folks who are just getting started. SmartMoney's Perfect
Portfolios give you a running start on determining the right asset allocation for your
age. Our asset allocation tools for workers and retirees can also serve as a starting
point.

How to Build an Easy, Beginner

Set and Forget Investment
Portfolio
Many people dont invest because it seems overly complicated. But if you want to build
wealth, investing now is the easiest way to do soand anyone can do it. Here are some basic
steps to set up a simple, beginner investment portfolio that will make you money while you
sleep.
Investing Is Easy: Just Set It and (Mostly) Forget It
When a lot people think of investing, they imagine painstakingly picking individual stocks,
tracking their daily performance and constantly buying and selling. This might make for
good movies and TV shows, and sure, you could hire a financial adviser to do this for you,
but the fact of the matter is that most financial advisers fail to beat the market. So, why pay
a financial adviser a bunch of money for something you could do on your own? (If youre
dealing with an abnormally large sum of money, though, and are a bit over your head, a good
financial adviser can be a worthwhile endeavor.)
Instead, most smart investors try to match the market, which, over a long period of time,
tends to improve. Past performance isnt an indicator of future performance, but its all we
haveand over the long term, the stock market averages about a 7% annual return. Thats
pretty solid!
So, all you need to do is pick a couple funds that attempt to mimic the total markets
behavior, andfor the most partleave them alone for 20 or 30 years. Its very simple, and
its something everyone can and should do. In fact, its one of the best ways to effortlessly
build wealth in the long term.
Many refer to this as buy and hold or set it and forget it investingbecause it requires
little effort and you dont have to constantly track your portfolio. You will have to check in
once a year or so, but it takes minimal work, and you can mostly leave it alone. Which is
perfect for us average joes.
Step Zero: Open an Investment Account
If you dont have an employer-sponsored 401(k), youll need to open an investment account
in order to actually start investing. If this is your first investment account, youll probably
want to open an Individual Retirement Account, or IRA. Weve outlined the process here,
but here are the basics:
Decide whether you want a Traditional or a Roth IRA. If youre self-employed, you might
want a SEP-IRA. Learn about the differences here.
Pick an investment firm that offers an IRA, like Vanguard or Fidelity. Many banks offer
them, too. Wells Fargo, for example, has a few to choose from.
Open an account. If you have assets in an old 401(k) to add to the account, make sure to roll
over properly.
Connect your checking or savings to the account and start buying index funds.
Once youre all set up, its time to start thinking about what to invest in.
Step One: Figure Out Your Asset Allocation

Theres more to the market than just stocks, and a good portfolio will usually include a few
different types of investments. At the very least, youll want a mix of stocks and bonds, with
both US and international options for both.
How much of each depends on your age, risk tolerance, and investment goals. A common
rule of thumb is:
110 - your age = the percentage of your portfolio that should be stocks
So, if youre 30, youd put 80% of your portfolio in stocks (110 - 30 = 80) and the remaining
20% in lower-risk bonds. If youre more conservative, however, you may want to put 30% in
bonds instead. Its up to you, but this is a good starting point.
Then, as you grow older, you should adjust your asset allocation accordingly. So if youre
following the 110 rule above, youll want to buy more bonds when youre 40, so that you have
20% in bonds instead of 10the idea being that, the closer you get to retirement, the less
volatile your portfolio becomes.

If youre having trouble deciding your asset allocation, there are a few tools out there to help.
Bankrate has an asset allocation calculator that can help you out, or you can use a full service
like Personal Capital. Personal Capital is a web site that actually tracks your investments.
Its kind of like Mint, but for investing. It shows you how you should be allocated as your
investments grow.
Personal Capitals asset allocation tool actually lets you personalize your portfolio a little
more. The basic formula mentioned above is a good starting point, but it uses only your age
as a guideline. With Personal Capitals tool, you fill out a portfolio and answer questions
about when you plan to retire and how much risk youre comfortable with. Based on your
answers, they give you a more customized allocation.

Once you link your investment accounts to Personal Capital, you can select their Investment
Checkup tool to see how your current investments compare to your target allocationhow
you should be invested. Theyll show you exactly what you should be more invested in, and
what you should be less invested in.
This is a great primer on asset allocation if youd like to learn more. (These arent the only
types of assets you can hold, eitheryou can also invest in real estate, TIPS, and other
thingsbut for simplicitys sake, were going to start with stocks and bonds.)
Step Two: Choose Some Index Funds
The best way to get started investing is to choose a couple of index funds. An index fund is a
collection of stocks or bonds that aims to mirror a specific portion of the market. Theyre
great because they have particularly low fees (or expense ratios). That, coupled with the fact
that they attempt to match the market, mean higher returns for you over the long term. You
can read more about index funds (and how they differ from other funds) in this article, if
youre interested.
Of course, there are a lot of index funds out there, so lets talk about how to pick which ones
are right for you.
The Ideal Scenario: Pick a Lazy Portfolio
You can create a complex portfolio of many funds, but you only really need two or three to
get started. You dont need to start from scratch and pick funds at random, eitherone of
the best ways to get started is with a lazy portfolio. Think of it as a starter pack for index
funds: a couple of basic funds that will get you a simple, balanced portfolio that matches the
market in a few different classes. You can check out a few example lazy portfolios over at the
Bogleheads Wiki, but lets walk through some easy ones.
In an IRA or regular investment account, youll be able to choose whatever index funds you
want, so lets talk about this ideal scenario. If youre investing in a 401(k) with limited
choices, well get to that in a bitjust stick with us.
So, lets say you want an asset allocation of 90% stocks and 10% bonds, the easiest portfolio
would be Rick Ferris two-fund portfolio, which uses two very popular funds from Vanguard:

The total world stock index fund attempts to mirror the performance of the worlds stock
market in one fundtalk about easy! The bond fund does the same. Of course, youd adjust
the percentage of bonds and stocks to match your asset allocation (for example, 90-10).
The total world stock index fund contains around 50% US stocks and 50% international
stocks. If you prefer to change that weightingsome might like to put less than 50% into
international stocks, for exampleyou could use a three-fund portfolio like this one:

Again, adjust the percentages to match the allocation you want. (In this case, the portfolio
totals 60% stocks, 40% bonds).
Also, keep in mind: some index funds have minimum buy-ins. This means you might have
to buy at least $3,000 worth of the fund to buy any at all. We name a few funds with cheaper
buy-ins here. Note that as you put more into your account, you may qualify for funds with
lower net expense ratios, like Vanguards Admiral Shares or Fidelitys Advantage Class.
Thats all you need to get started. Invest in two or three funds, make sure they have low
expense ratios (ideally under 0.25% or so, but the lower the better), and make sure they
match your ideal asset allocation. Again, there are a lot of other things you can invest in too
real estate, TIPS, and so onbut you dont need a perfect portfolio right out of the gate. The
goal is to get started, and this is a great starting point.
The Less-Than-Ideal Scenario: If You Have a Limiting 401k
The above option is perfect for a basic investment account or an IRA, where you have lots of
choices. However, if you have a 401(k) through your employeror a similar retirement plan
like a 403(b)you may have a more limited selection of funds. Some are decent, some are
horriblebut either way, your 401(k) is worth taking advantage of for the tax benefits.
Lets say you have a 401(k) with some decent funds, but nothing as simple as the total stock
and bond market funds listed above. For example, maybe you have the total bond fund, but
youre missing the total stock market fund. You can approximate the total stock market with
some other available funds, as described here. For example, you could combine:
An S&P 500 fund (which includes 500 of the largest companies in the US)
A mid-cap index fund (which includes medium-sized companies, making up for the
medium-sized companies missing from the S&P 500)
A small-cap index fund (which includes smaller companies, making up for the small
companies missing from the S&P 500)
...provided your 401(k) offers funds like that. It wont be the exact same, but with the right
ratios, itll be close:

If youre lucky, your 401(k) will include enough funds that you can approximate your desired
asset allocation in this fashion. Again, you can see more examples of this (using a variety of
different funds) here. Remember: Look at the funds net expense ratio to make sure it isnt
too high!
The Crappy Scenario: If Your 401k Has a Bad Selection of Expensive Funds
Okay, lets say your 401(k) is missing some of the funds youd need to round out your asset
allocation. Or, maybe your 401(k) just plain sucks and has nothing but expensive funds (with
expense ratios above 1%). What do you do then?
As weve talked about before, there are a lot of advantages to having both a 401k and an IRA,
and this strategy is especially useful if your 401(k) doesnt offer a lot of flexibility. If you
decide to have both, this is ideally how youd invest in them:
Contribute only enough in 401k to take advantage of employer match.
Contribute any additional savings to an IRA, which has more flexibility.
If you still have money after maxing out your IRA (you can see the limits here), then go ahead
and put it in your 401k.
If you max out both your 401k and your IRA (wow, good for you), you can open a regular
taxable investment account. These accounts are also good for more medium-term goals,
since retirement accounts dont let you withdraw until later in life.
You can do this no matter how good or crappy your 401(k) is. But heres the important trick
if you have a crappy 401(k): Use your 401(k) for the lowest cost fund(s) you can find (that
have performed well over the past 10 or 15 years), then use your IRA to invest in the cheap
index funds youre missing for that ideal asset allocation. Make sure the money you invest
matches the overall percentages you laid out in step one! (Heres more information on how
to do that with multiple accounts.)
Step Three: Contribute Regularly and Rebalance Annually
So youve bought your funds, and youre all proud of the asset allocation you put together.
Good job! Now, your best bet is to set up a recurring depositsay, whenever you get your
monthly paycheckso youre always saving a bit of money in your investment account. If
you have a 401(k), this is especially important, since that money is tax-deferred! This will
help your investments grow over time. Treat your savings and investments like a bill, and
youll never be tempted to overspend.
Then, once youre done, forget about it.
Seriously, walk away. Dont check it every couple days, dont obsess over whether the
markets going up or down, dont do anythingremember, youre in this for the long haul,
and market dips and peaks dont matter as much as the general trend over years and years.
You will, however, want to check your portfolio every year or so and re-balance. What does
that mean? Lets say youre invested in 20% bonds, 50% US stocks, and 30% international
stocks, like so:

And, for example, lets say that international markets do particularly well one year (and US
stocks go down a bit). Youll earn more money in those international stocks than in the other
areas of your portfolio, and at the end of that year, your portfolio may look more like this:

You want to re-balance that so it matches your original asset allocation. Stop contributing to
the international stock fund(s) and send that money to the bond and US stock fund(s)
instead. After a few months, it should balance out, and you can return to your original
contribution levels. (You can also sell some of your international stocks and re-invest it in
bonds and US stocks, but that may come with added fees).
A Much Simpler Alternative to All of The Above: Target-Date Funds
If all that sounds a little too complicated, there is a simpler solution: invest all your money
into a target-date fund.
Target-date funds (also sometimes called lifecycle funds) aim to do the work for you by
splitting up your money into a balanced mix of stocks, bonds, and other holdings. It then
adjusts them over time, rebalancing regularly and adjusting its asset allocation as you grow
older (so as you grow older, itll automatically put more into bonds for you). Nice, huh?
Its insanely convenient: you just pick the one with the year you plan to retire, put all of your
money into it, and just let it grow. So, if you plan to retire in 2055, youd choose the 2055
target date fund from Vanguard, Fidelity, or whomever youre investing with. If you plan to
retire in 2050, youd choose that one instead. You can also choose a different one depending
on your risk tolerance. If you prefer to be more conservative, for example, you can choose
one with an earlier retirement date, that might give you more bonds at an earlier age. Or
vice-versa. Just be sure to check your target date funds prospectus to see how it changes its
asset allocation over time. Some may be more conservative or risky than you expect.
Similarly, if youre opening an IRA or taxable investment account, you can try a robo-
advisor, which will pick your investments for you based on your goals.

Should I Let a Robo-Advisor Manage My Investments or Do It

Myself?
Dear Lifehacker,I keep hearing about automated investment services like Betterment
and Wealthfront. Read more on lifehacker.com
So why go through all the trouble of picking your own index funds when automatic solutions
like target-date funds are so convenient? Well, target-date fundswhile greattend to have
slightly higher fees. Some will be higher than others, so use an expense ratio calculator like
this one to see how much it would matter in the long term.
To give an example: Say youve put together your own portfolio with Vanguard funds
averaging an expense ratio of 0.05%, compared to Vanguards target-date fund, which clocks
in at 0.18%still low, by many standards, but still .13% higher than the do-it-yourself
method.
If you max out your 401k every year for 30 years, that .13% savings can add up to $50,000
more in your account, just for taking the minimal effort of the DIY approach. Thats a decent
amount of money for a little work. And Vanguards target-date funds are considered quite
cheap compared to their brethren, so this is a best-case comparison. If you have a less-than-
ideal 401(k), the difference could be much more than $50,000.
I dont mean to poo-poo target-date funds. Theyre fantastic for people who dont want to do
a bunch of work, and would otherwise not invest at alland if thats you, by all means, dump
all your money in a target-date fund and let it grow! But creating your own portfolio gives
you more control and lower fees, which can add up to a lot...as long as you do your
homework.

That may seem complicated, but once you get over the initial hump, youll have a simple,
set-and-forget portfolio ready to start making you money. These arent the only investing
strategies in the world, mind you, but this is some of the most popular advice, and its perfect
for a beginner portfolioand when it comes to investing, the most important thing is that
you get started now.
If you want some more resources on these strategies, here are a few good places to start:
If youre interested in a more detailed introduction to investing, try a book like The Four
Pillars of Investing, the Bogleheads Guide to Retirement Planning, or I Will Teach You To
Be Rich (which is slightly more about personal finance, but has a good beginner investing
section)
The Bogleheads Wiki, which weve linked to a few times in this article, has some great
information, including lots of other lazy portfolios and examples.
The /r/personalfinance wiki at Reddit has a lot of basic information on all things personal
finance, including investing. Their step-by-step guide to fund selection is fantastically laid
out.
Mr. Money Mustaches blog and forum are both good places for personal finance and
investing info along these same lines.
And if you have any specific questions, the forums mentioned above are great places to get
some basic advice. Good luck!

4 Steps to Building a
Profitable Portfolio
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 strategies. In other
words, your portfolio should meet your future needs for capital and give you peace of
mind. Investors can construct portfolios aligned to their goals and investment
strategies by following a systematic approach. Here are some essential steps for taking
such an approach.
Step 1: Determining the Appropriate Asset Allocation for
You
Ascertaining your individual financial situation and investment goals is the first task in
constructing a portfolio. Important items to consider are age, how much time you have
to grow your investments, as well as amount of capital to invest and future capital needs.
A single 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.
A second factor to consider is your personality and risk tolerance. Are you willing to risk
some money for the possibility of greater returns? Everyone would like to reap high
returns year after year, but if you can't sleep at night when your investments take a short-
term drop, chances are the high returns from those kinds of assets are not worth the
stress.
Clarifying your current situation, your future needs for capital, and your risk tolerance,
will determine how your investments should be allocated among different asset classes.
The possibility of greater returns comes at the expense of greater risk of losses (a
principle known as the risk/return tradeoff) you don't want to eliminate risk so much as
optimize it for your unique condition and style. For example, the young person who won't
have to depend on his or her investments for income can afford to take greater risks in
the quest for high returns. On the other hand, the person nearing retirement needs to
focus on protecting his or her assets and drawing income from these assets in a tax-
efficient manner.
Conservative Vs. Aggressive Investors
Generally, the more risk you can bear, the more aggressive your portfolio will be,
devoting a larger portion to equities and less to bonds and other fixed-income securities.
Conversely, the less risk that's appropriate, the more conservative your portfolio will be.
Here are two examples: one for a conservative investor and one for the moderately
aggressive investor.

The main goal of a conservative portfolio is to protect its value. The allocation shown
above would yield current income from the bonds, and would also provide some long-
term capital growth potential from the investment in high-quality equities.
A moderately aggressive portfolio satisfies an average risk tolerance, attracting those
willing to accept more risk in their portfolios in order to achieve a balance of capital
growth and income.
Step 2: Achieving the Portfolio Designed in Step 1
Once you've determined the right asset allocation, you need to divide your capital
between the appropriate asset classes. On a basic level, this is not difficult: equities are
equities and bonds are bonds.
But you can further break down the different asset classes into subclasses, which also
have different risks and potential returns. For example, an investor might divide the
equity portion between different sectors and market caps, and between domestic and
foreign stock. The bond portion might be allocated between those that are short-
term and long-term, government versus corporate debt and so forth.
There are several ways you can go about choosing the assets and securities to fulfill
your asset allocation strategy (remember to analyze the quality and potential of each
investment you buy not all bonds and stocks are the same):
Stock Picking Choose stocks that satisfy the level of risk you want to carry in the equity
portion of your portfolio sector, market cap and stock type are factors to consider.
Analyze the companies using stock screeners to shortlist potential picks, than carry out
more in-depth analysis on each potential purchase to determine its opportunities and
risks going forward. This is the most work-intensive means of adding securities to your
portfolio, and requires you to regularly monitor price changes in your holdings and stay
current on company and industry news.
Bond Picking When choosing bonds, there are several factors to consider including
the coupon, maturity, the bond type and rating, as well as the general interest-
rate environment.
Mutual Funds Mutual funds are available for a wide range of asset classes and allow
you to hold stocks and bonds that are professionally researched and picked by fund
managers. Of course, fund managers charge a fee for their services, which will detract
from your returns. Index funds present another choice; they tend to have lower
fees because they mirror an established index and are thus passively managed.
Exchange-Traded Funds (ETFs) If you prefer not to invest with mutual
funds, ETFs can be a viable alternative. ETFs are essentially mutual funds that trade
like stocks. They're similar to mutual funds in that they represent a large basket of stocks
usually grouped by sector, capitalization, country and the like. But they differ in that
they're not actively managed, but instead track a chosen index or other basket of stocks.
Because they're passively managed, ETFs offer cost savings over mutual funds while
providing diversification. ETFs also cover a wide range of asset classes and can be
useful for rounding out your portfolio.
Step 3: Reassessing Portfolio Weightings
Once you have an established portfolio, you need to analyze and rebalance it
periodically, because market movements may cause your initial weightings to change.
To assess your portfolio's actual asset allocation, quantitatively categorize the
investments and determine their values' proportion to the whole.
The other factors that are likely to change over time are your current financial situation,
future needs and risk tolerance. If these things change, you may need to adjust your
portfolio accordingly. If your risk tolerance has dropped, you may need to reduce the
amount of equities held. Or perhaps you're now ready to take on greater risk and your
asset allocation requires that a small proportion of your assets be held in riskier small-
cap stocks.
To rebalance, determine which of your positions are overweighted and underweighted.
For example, say you are holding 30% of your current assets in small-cap equities, while
your asset allocation suggests you should only have 15% of your assets in that class.
Rebalancing involves determining how much of this position you need to reduce and
allocate to other classes.
Step 4: Rebalancing Strategically
Once you have determined which securities you need to reduce and by how much,
decide which underweighted securities you will buy with the proceeds from selling the
overweighted securities. To choose your securities, use the approaches discussed in
Step 2.
When selling assets to rebalance your portfolio, take a moment to consider the tax
implications of readjusting your portfolio. Perhaps your investment in growth stocks has
appreciated strongly over the past year, but if you were to sell all of your equity positions
to rebalance your portfolio, you may incur significant capital gains taxes. In this case, it
might be more beneficial to simply not contribute any new funds to that asset class in
the future while continuing to contribute to other asset classes. This will reduce your
growth stocks' weighting in your portfolio over time without incurring capital gains taxes.
At the same time, always consider the outlook of your securities. If you suspect that
those same overweighted growth stocks are ominously ready to fall, you may want to
sell in spite of the tax implications. Analyst opinions and research reports can be useful
tools to help gauge the outlook for your holdings. And tax-loss selling is a strategy you
can apply to reduce tax implications.
Remember the Importance of Diversification.
Throughout the entire portfolio construction process, it is vital that you remember to
maintain your diversification above all else. It is not enough simply to own securities
from each asset class; you must also diversify within each class. Ensure that your
holdings within a given asset class are spread across an array of subclasses and
industry sectors.
As we mentioned, investors can achieve excellent diversification by using mutual funds
and ETFs. These investment vehicles allow individual investors to obtain the economies
of scale that large fund managers enjoy, which the average person would not be able to
produce with a small amount of money.
The Bottom Line
Overall, a well-diversified portfolio is your best bet for consistent long-term growth of
your investments. It protects your assets from the risks of large declines and structural
changes in the economy over time. Monitor the diversification of your portfolio, making
adjustments when necessary, and you will greatly increase your chances of long-term
financial success.