The following steps can be used as a guide for a beginning investor to create an investment portfolio.

 

1. Identify and set specific investment goals that you are trying to achieve

 

• This step involves evaluating how much money you have, and how much of that money you plan on investing

 

• Identify your investment horizon or how long you plan on investing, this can be short, medium or long term. Short term could be 1-3 years, mid-term 3-5 years and long term 5-15 or 30 years

 

•  Evaluate your risk tolerance or how much risk you can take on. As a rule of thumb always remember that if you want to generate very high returns or grow your portfolio substantially you should be willing to take on some risk

 

2. Research and select investment assets that will help you achieve those investment goals – this involves utilizing investment tools that can help you select the best asset classes for your portfolio, be it Stocks, Bonds, Real Estate, commodities or cash. The five investment classes mentioned can be further grouped under four broad risk metrics ranging from low to high risk investments.

 

• Very high Risk (Speculative) – Commodities, Options, and other speculative assets

 

• High Risk (Growth) – Stocks and Real Estate

 

• Medium Risk (Safety & Income) – Fixed Income Bonds, Corporate & Government Bonds

 

• Low Risk (Security) – Cash, Money Markets, Annuities, Savings Bonds.

 

When selecting investments for your portfolio remember that

• Growth investments are recommended if you are looking to grow your portfolio significantly and also beat inflation in the long term. 

• Safety and Income investments are recommended if you are looking to generate consistent income and also avoid a lot of volatility in the market.

• Security investments are needed to meet short term obligations and also provide short term needs and liquidity. 

 

3. Allocate  selected assets. This is the process of deciding on how much money you want to invest into each selected asset class. The rule of thumb is to avoid investing all of your money into one asset because you stand the risk of losing a lot of your investment if that asset declines in value.

 

4. Ensure that your portfolio is diversified across all asset classes. This is the step of ensuring that your investments are well diversified across all asset classes. Selecting assets that are well diversified will help reduce the risk of loss if there is a decline in some class of assets within the portfolio. This is because a portfolio that is well diversified with low correlated assets will offset each other if one class of assets decline in value.

 

5. Monitor your portfolio and rebalance over time. Monitor your portfolio over time and sell assets if the need arises, to ensure that your portfolio's allocation meets your investment goals . Rebalancing is required over time because some assets grow faster than others and thus the need to sell assets and rebalance portfolio to match your needs and risk tolerance. 

 

6. Benchmark your portfolio. This means finding a benchmark that you can compare your portfolio's performance to, this enables you see how your portfolio is performing relative to the market. For example you can use the S&P 500 index as a benchmark for your portfolio.