How to build a proper investment portfolio

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.