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How to build a proper investment portfolio

Follow these tips to build an investment portfolio that fits your needs.

Updated
4 min. read

Everyone wants to know how to build an investment portfolio that performs well over time. Unfortunately, there’s no one-size-fits-all approach for achieving solid returns. To be successful, investors must create a portfolio that suits their individual needs and investment style. “The worst thing investors can do is to follow the herd,” says Brian Belski, chief investment strategist at BMO Capital Markets.

Instead, investors need to “default the process” – in other words, choose the right kind of investments, in the right proportions, to feel comfortable with market fluctuations and still meet their goals. That way, Belski says, “they won’t lead with emotion and buy an asset just because it’s going up, or sell because it’s going down.”

Morgan Ulmer, a Calgary-based certified financial planner, agrees.

“Most investors who say the market doesn’t work are those who were invested in a way that was outside their risk tolerance and so they sell when things get rough and then miss the recovery. The secret is to build a diversified investment portfolio with an asset allocation you are comfortable with.”

No matter what your investment style – aggressive, conservative or somewhere in between –here are some guidelines for building a stock portfolio that pays off.

Mix it up

Even those who are comfortable with risk should be properly diversified, says Belski, which means having a mix of stocks, bonds, real estate and private equity. It’s also important to not be too heavily invested in any one sector, which can be an issue in Canada, with our many energy and financial sector companies. Fortunately, there are other sectors to consider. “In Canada, we have strong communications and consumer sectors, so diversify into these,” he says.

In the U.S. health care, industrials and consumer staples – all companies with strong balance sheets, steady cash flows, earnings and dividend growth – could make sense in a model portfolio. Canada doesn’t have many publicly listed health care companies, which means you need to look elsewhere if you want to own a broad basket of equities.

Watch where you work

Diversification also requires looking at other factors, such as sources of income, says Ulmer. For example, she sees many investors in Calgary investing in the energy sector, which can be an issue when oil prices fall. “These employees not only depend on the salary of their employer, but also have an employee stock purchase plan and thus have too high exposure to one particular equity,” she says.

Look at all your accounts

Similarly, when determining your asset allocation, look at your entire portfolio including any pension plans you may be contributing to. Younger investors can afford to take on more risk because they have more time to recover from a downturn. But, if they do have, say, a more conservative pension plan or know they’ll receive Canada Pension Plan benefits when they retire, then they may be able to take on more equity risk than they think.

What’s most important is that your total percentage of equities and bonds – across all investment accounts, not just one – suits your risk tolerance level, says Ulmer.

“Investors need to ‘default the process’ to feel comfortable with market fluctuations and still meet their goals.”

Buy based on your needs

There are plenty of reasons why people invest and it doesn’t always have to do with saving for retirement. Some might want to put money away to buy a house, others may want to save for a child’s education. Still others may want some extra money to pay for day-to-day expenses.

What you put into your portfolio will depend on your goals. For instance, if you think you’ll buy a new car in three years, you might purchase more conservative investments, such as short-term bonds or reliable blue-chip stocks. That way you’re protecting your principal against a big loss – bond prices often rise when stocks fall – while potentially earning a return on those savings in the meantime. So, consider your goals as your build a stock portfolio.

If you’re in retirement you may want to buy more dividend paying stocks and use those payouts to help fund your lifestyle. In that case calculate how much you need on a monthly or quarterly basis and then develop a portfolio that generates the income you require. “That’s when you’ll want a higher mixture of your portfolio in income-deriving vehicles,” says Belski.

Ultimately, when building an investment portfolio, investors need to look deep within themselves to understand their goals and their risk tolerance level. If they have an asset allocation they’re comfortable with – and can stick with it through the ups and downs of the market – they’ll have healthy investment performance over the long term. “Focus on fundamentals, buy assets you understand, and everything will be okay,” says Belski.

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