Last week was quite busy for me as I took time off from blogging and focused my energy on rebalancing my personal asset portfolio.
And this week, I’d like to share with you how that is basically done.
This three-part post will give you a simple and beginner’s guide to creating your portfolio, diversifying your assets, and how to rebalance them to ensure that they will always meet your investment goals.
To start things off, I’d like to give you an overview on the topic of asset allocation.
As always, before you invest, there are two things you need to be able to accomplish first before anything else, they are:
- You have been living below your means for quite some time now – which follows that you don’t have huge and outstanding consumer or credit card debts.
- You already have an emergency fund. This should be at least 6 months worth of your expenses saved as cash.
Asset Allocation 101
A few months ago, I gave a simple formula to creating your starting portfolio which is solely based on your age.
To review, your portfolio should contain low-risk, moderate-risk and high-risk investments – whose percentage allocation should follow the formula:
- Low Risk = AGE / 2
- Moderate Risk = 50%
- High Risk = (100 – AGE) / 2
This means if you’re 40 years old, then 20% of your portfolio should be in low-risk investments, half or 50% should be in moderate risk investments, and 30% in high-risk investments.
Simple enough, right?
Now that you’ve determined your portfolio’s risk percentages, it’s now time to decide where to invest exactly. Below are some of your choices:
Low Risk Investments
- Cash Deposits (time deposits, special deposit accounts, etc)
- Bonds (savings bonds, government bonds, treasury bills, etc.)
- UITF and Mutual Funds (money-market funds, short-term funds, etc.)
- Insurance (term life, VUL, long-term healthcare, etc.)
- Small-scale business ventures (home-based businesses, small-cap franchises, single-prop businesses, etc.)
Medium Risk Investments
- UITF and Mutual Funds (balanced funds, index funds, etc.)
- Network or Multi-level Marketing business
- Medium-size business enterprises (medium-cap franchises, single-prop or partnership businesses)
- Real Estate (private equity funds, real estate investment trust funds, etc.)
High Risk Investments
- UITF and Mutual Funds (equity funds, foreign currency funds, etc.)
- Large-cap businesses (master franchising, corporations, etc.)
- Stock Market and Currencies or Forex (trading, speculative investing, etc.)
- Real Estate (property flipping, acquisition of rental assets, etc.)
Be sure to choose investments and assets that’s in line with your interests, and more importantly, those which suit your investment horizon and objectives.
When NOT to follow the formula:
Personal finance is personal
The above age formula is just a suggestion. And please keep in mind that personal finance is always a personal endeavor – nobody can decide how exactly you should handle your money better than you.
The psychology of risk
Fear and greed – two emotions that you need to control to be able to succeed in investing. If you’re still learning how to master them, then it’s better to have less high-risk investments first.
A vision of the future
The economy, both local and global, play an important role on how investments perform. The better the outlook on the country’s future economic growth, the more aggressive you can be with your investments.
End of Part 1
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Disclaimer: The investing tips in this post is solely based on personal knowledge and experience. It does NOT constitute as professional financial advice. Consult with a certified adviser to address your specific financial concerns.
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