How to Build Your Investment Portfolio
November 2, 2022
A good portfolio will address two important principles. Investing to achieve a higher expected return and managing risk, writes Peter Watson.
As an example, we will consider saving for your child’s university education. The same logic can be applied to other financial objectives.
Assume a university education will cost $25,000 per year over four years for a total of $100,000. If your child is very young, they could have 15 or more years before they will require the educational funding.
Many families may want to grow their educational savings by investing in growth-oriented assets like mutual funds that own stocks. Stocks have a higher expected return that owning something more conservative, for example bonds.
If the value of the mutual fund declines because the stock market is performing poorly, the child has many more years that will allow the potential for those losses to be replaced by gains.
That seems to make sense. But what if your child plans to be off to university in just one year? Does the mutual fund that owns stocks adequately manage investment risk?
If there is a sudden drop in the value of the equity mutual fund, there might not be enough time for the stock market to recover and therefore there is a risk the child would not be adequately funded to attend university.
A child with only a few years left before attending university might be better served owning a more conservative investment.
The simple investing formula of increasing expected returns and managing risks are the main two components of most portfolios.
Peter Watson is registered with Aligned Capital Partners Inc. (ACPI) to provide investment advice. Investment products are provided by ACPI. ACPI is a member of the Investment Industry Regulatory Organization of Canada. The opinions expressed are those of the author and not necessarily those of ACPI. Only investment-related products and services are offered through Watson Securities of ACPI. Peter Watson provides wealth management services through Watson Investments. He can be reached at www.watsoninvestments.com