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Chapter 19 — Portfolio Management
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Portfolio Management

Portfolio Management

Before You Start

Managing and balancing a portfolio can be a tricky process. But before you can jump into building your portfolio, there are a few important steps you must take. First, you need to make sure that you are financially healthy. Then you need to make a plan for how to manage your portfolio. Once you have done those two things, then you will be ready to start investing.

A. Financial Health

The number one rule for investing is that you should never risk money that you can’t afford to lose. If you start to build a portfolio with money that you need to survive, you will eventually be forced to sell good investments. Sometimes these forced sales will happen during a depression, which will hurt twice as much when the investments recover without you.

So to make sure that you are investing with money you can afford to lose, you should make sure that you can pay your mortgage and cover your basic livings expenses. For added insurance, maintain a “safety” fund that includes about 3 to 6 months of income. After you have these bases covered, you should have enough money left over to invest without having to worry about forced sales.

B. Portfolio focus: Growth or Income?

The focus of your portfolio depends highly on your investment time period and your age. Most investment advisors recommend that shorter time periods call for much safer investments. For example, if you are saving for college or a new car, and your investment time period is two or three years, you will want to look at safe investments such as money market funds or short-term bonds.

If you are you saving for retirement or some other long-term goal, the most often cited advice is that your age should be the percentage of income investments that you hold. So if you are 20 years old, then your portfolio should have 20% income investments. As you get closer to retirement, you will shift larger portions of your portfolio to these safer investments. Older people generally want to have more income than growth.