3 Questions To Ask When Building Your Investment Portfolio
It’s Different This Time, or is it?
History doesn’t repeat itself, but it often rhymes. The events that drive the stock market’s downturn tend to differ, but the results are inevitably the same, turbulence in the stock market leading to uncertainty.
Looking at the history of the stock market and different economic crises, the only precedent is recovery. The events that trigger the financial crises may start differently, but the story always ends the same. Focus on the fact that the stock markets have always recovered.
We’re not saying, “Don’t worry.” I believe that to be unwise advice. In fact, us telling you not to panic is terrible advice. If someone tells me not to panic, it MAKES me panic! In moments of stock market volatility, it helps to remember how and why your investment portfolio is positioned as it is.
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3 Questions to ask when Building A Portfolio
It’s difficult not to stress over our investments as we watch our net worth decrease because our 401ks or other investment accounts drop. I have found, however, that these three questions that follow help shape an appropriate portfolio consistent with our investment objective and should be a source of confidence as we weather turbulent markets.
What is the purpose of your money?
Is your money intended for a long-term or a short-term purpose? A retirement portfolio will be invested differently than money set aside intended as a down payment on a house.
What is the likelihood you will need your money before the intended purpose?
If you have a well-funded emergency fund, you are less likely to find yourself in a situation where you will need to sell your investments unexpectedly. That emergency fund “buys” you time to recover from down markets. You are free to take on more risk in your portfolio with the reasonable expectation of higher long-term increases in your portfolio value.
What is your overall risk tolerance?
Risk is unavoidable, and our ability to tolerate that risk varies. The value of your cash is at risk during inflation, and you can’t buy as much as you once did. Money invested in stocks and mutual funds is subject to the stock market risk. The amount of risk you are willing to accept will impact the value of your portfolio over time. Investing in stocks comes with a higher risk than holding cash; however, the reward is more significant.
Have you reviewed your portfolio in light of the 3 questions?
Are you confident in how your portfolio is invested?
