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Financial Literacy - Financial tuneup
OVERVIEW
How to build a sound portfolio
Asset allocation is the single most important determinant of portfolio performance.
Investment tuneup

Building a portfolio

However, Brosious would like to see those with a long investment time horizon develop a thick hide with which to weather market volatility. "I tell my younger clients, you are going to be rewarded for assuming this short-term volatility by being more aggressive. In the long-term the market has, over time, returned 10 (percent) or 11 percent. That's the historical return. In the short-term, don't even look at your portfolio," he says.

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Most experts shy away from using rules of thumb as far as how portfolios should be divided, but a "typical" moderately conservative portfolio might have a 60 percent allocation to equities and a 40 percent allocation to fixed-income investments. A more aggressive portfolio would apportion more money to equities, whereas a more conservative one would have a higher weighting in bonds.

A smoother ride
Steadier returns over time come from diversification within both hemispheres of the portfolio. Real diversification requires using assets that move in different or varying patterns to one another, says Kinder. "What you want to do when you build a portfolio is look for assets that have no or very little correlation to one another -- or things that zig while others are zagging."

In an ideal world, asset classes would move in opposite directions, but that will never exist, says Brosious. The best you can do is spread out investments into many different segments that have little to do with one another.

"A truly diversified portfolio contains mutual funds with large-cap U.S. stocks, U.S. small-cap stocks along with small-cap international stocks, emerging markets stocks, real estate investment trusts and even commodities, such as oil, gold, industrial metals, agriculture and livestock. Even with bonds, investors need Treasury (inflation-protected) bonds along with international bonds to complement the usual medium-term Treasury and corporate bonds," says Kinder.

"When you add these things together you're going to get a smoother ride, as well as higher returns," he says.

Once your investment pie is meted out into individual slices and money is poured into investments, sticking within the planned proportions becomes the maintenance work. Kinder recommends rebalancing accounts at the end of every year. To bring the percentages back into line with the original plan, "you sell a portion of the assets that did well during the year and buy more of the assets that did poorly so you're always going to have a systematic process where you sell high and buy low."

-- Updated: June 11, 2009
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