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How to Build a Profitable Investment Portfolio


The first part of building a profitable investment portfolio is having clear financial goals and a firm understanding of your risk tolerance, which will guide your investment choices and asset allocation. It can also help to understand the different asset classes you have to choose from – stocks, bonds, real estate, etc. – and how they fit into your risk profile. Once you’ve built a potentially profitable investment portfolio, however, the work isn’t over. You’ll want to regularly review and rebalance your portfolio as market conditions change to maintain your portfolio’s alignment with your financial goals. If you have questions about the process, you can always consult with a financial advisor. A financial advisor can provide advice and insights tailored to your portfolio and financial situation.

Create a Plan – Assess Risk Tolerance and Asset Allocation

Risk tolerance refers to your ability and willingness to endure market volatility and potential losses. It can be influenced by factors such as your age, income, financial goals and investment experience. You can either assess your personal risk tolerance through self-reflection or by using risk assessment tools provided by financial advisors. Understanding your risk tolerance can help you make more informed decisions about the types of investments that align with your comfort level and financial objectives.

Asset allocation involves distributing your investments among various asset classes like stocks, bonds and real estate. This strategy is important for managing risk and optimizing returns. A well-balanced portfolio should reflect your risk tolerance, with more aggressive allocations typically including a higher proportion of stocks, while conservative ones favor bonds and other stable assets. The goal is to create a mix that can weather market fluctuations while providing steady growth over time.

For example, as individuals approach retirement, they often transition their portfolios to an asset allocation that favors safer investments over riskier ones. This is because once they retire and are largely reliant on their portfolios for income, they can no longer weather any substantial losses, nor have the time to wait out any downturns and hope to make back any lost gains.

Execute Your Plan – Choose the Right Investments

Building a profitable investment portfolio might take time and effort, but it can be an important part in securing financial stability.

Choosing the right investments for a profitable portfolio starts with understanding the various asset classes available. Stocks represent ownership in a company and offer growth potential, but come with higher volatility. Bonds, on the other hand, are debt instruments that provide steady income with lower risk. Real estate investments can offer both income and appreciation, adding another layer of diversification.

Each asset class behaves differently under different market conditions, which makes diversification an important part of building a profitable portfolio. By spreading investments across different asset classes and sectors, you can reduce the impact of any single investment’s poor performance on your overall portfolio. This approach not only minimizes risk, but also enhances the potential for steady returns.

For example, when stocks underperform, bonds or real estate might offer stability, balancing your portfolio’s performance. A well-diversified portfolio can weather market fluctuations more efficiently, maintaining its profitability over the long term.

Stick to Your Plan – The Importance of Rebalancing

Over time, market fluctuations can cause your asset allocation to shift, potentially increasing your exposure to risk. This is why it’s important to regularly rebalance your investment portfolio. By periodically reviewing and adjusting your investments, you can keep your portfolio balanced, reflective of your risk tolerance and in alignment with your financial goals.

For example, if your target asset allocation is 60% stocks and 40% bonds, market gains in stocks could skew this balance, resulting in a higher risk profile than you intended. Portfolio rebalancing would involve selling some of the outperforming assets and buying more of the underperforming ones to return to your original allocation, thereby keeping your risk in check and enhancing the potential for a profitable portfolio.

There are several strategies to consider when rebalancing your portfolio. One common approach is time-based rebalancing, where you adjust your investments on a regular schedule, such as quarterly or annually. Another method is threshold-based rebalancing, which involves rebalancing only when your asset allocation deviates from your target by a certain percentage. This approach can be more responsive to market conditions.

Bottom Line

A couple sits down with their investment advisor to build a profitable portfolio.

Building a profitable investment portfolio involves having clear financial goals, assessing your risk tolerance and the appropriate asset allocation for your portfolio, putting together a diversified portfolio geared towards achieving those goals, and regularly rebalancing and managing your investments. While it might take time and effort, a profitable investment portfolio can be an important part in securing financial stability and a comfortable retirement.

Portfolio Management Tips

  • If you want to know how much money your investment could earn over time, SmartAsset’s free investment calculator can give you an estimate.
  • Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • If you’re trying to find the right mix of investments for yourself, try using SmartAsset’s free asset allocation tool to see what your portfolio might look like. 

Photo credit: ©, © Anthony Eddy, © Trade Latin