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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

Courting lady luck is a risky proposition in the business of investing. Picking stocks and timing the market is hard, but developing a solid investment strategy is easy when you approach it as a science.

"Building a portfolio is not an art, it's engineering," says Kirk Kinder, a Certified Financial Planner, or CFP, and owner of Picket Fence Financial in Bel Air, Md. Once you know the basic asset classes you should invest in and how much of your funds should be allocated to each, picking the right investment becomes the final step.

"Asset allocation will actually drive about 94 percent of the total return in your portfolio. That's been documented in a number of different places. That's why you need the right asset mix within the portfolio," says Kevin Brosious, a certified public accountant, CFP and president of Wealth Management Inc. in Allentown, Pa.

Minimizing the fear factor
Determining how to fold different asset classes into your strategy begins with your investment time horizon. A person retiring in two years will have a more conservative investing philosophy than a 25-year-old who's launching a career. The longer the timeline, the more aggressive investments can be, as long as the investor can emotionally weather the peaks and valleys of the market.

Asset allocation strategies
 
 
Source: Bankrate.com
SLIDESHOW:  |   
Courtesy of Kevin Brosious, CPA, CFP and president of Wealth Management

Risk tolerance measures the likelihood that you will spend long, sleepless nights crying over the inevitable dips in your portfolio, and it is a second factor in determining how much money should go into each investment class.

"The emotional investor gets nervous about the market and gets out and they never see the appreciation on the way back up," says Mike Flower, a partner at Financial Principles LLC in Fairfield, N.J. "If we balance it out properly for that person, they're not going to have those times where they get forced out by their emotions."

"Risk profiles show me whether a person is willing to accept risk, is willing to accept a lot of risk or if they are risk-averse and want a very conservative portfolio," says Brosious, an adjunct professor of investments and other business courses at Penn State and DeSales University.

-- Updated: June 11, 2009
 
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