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5 Basic Rules for Building a Profitable Investment Portfolio

May 30 2012

English: Markowitz-Portfolio Theory, Investmen...

English: Markowitz-Portfolio Theory, Investment Portfolio Management (Photo credit: Wikipedia)

Some people start making investments a little here and there to see how they do, others have a full plan for their retirement, and some even strive to make a full-time career out of investing. No matter what level of investing you are interested in, building a profitable investment portfolio is important for getting the maximum return on your investments.

Tailor Your Plans

Your age, available capital and time are all important factors that will shape your investment strategy. For example, someone in his or her 50s who is getting a late start on retirement planning may require a more aggressive approach than a recent college graduate. Then again, a younger person may not initially have as much money to invest and may need to take a low-risk, slow-growth approach. Use your individual needs and goals as a guideline for planning your investments.

Look at the Sum, Not the Parts

It is inevitable that some parts of your portfolio are going to do better than others. A perfectly 100% successful is nearly impossible to achieve. You are better off to look at your portfolio as a whole. As long as you are making more money than you are losing, don't be in too much of a hurry to dump investments that are floundering a bit, given time they may actually become much more profitable.

Diversify, Diversify, Diversify

You may love stocks, but it would be foolish to put all your money into the stock market. Spread your investments across as many venues as possible. Bonds, 401ks or IRAs and mutual funds are all good investments as well. Additionally, you should consider non-financial market investments like real estate. Investing in a start-up business or an expanding business can also be a good idea as long as you carefully weigh the risks.

Don't Forget About Taxes

From time to time, you will inevitably have to shift investments around from less profitable to more profitable ventures. However, it is very important that you consider more than the upfront dollar amount. If a certain investment is providing you with a huge tax break, it may be worth keeping even if it's not your most profitable venture. You have to look at the big picture and take the entire value of your investment into account before you decide if it is worth keeping or not.

Avoid Trends

It may be tempting to jump on the bandwagon and cash in on a recent trend, but a sharp jump in a stock's value or an increase in a certain market is no indicator that it will continue to be profitable. Look at the dot-com bubble that burst in the late 90s or the downturn in the housing market after 2006. Pre-2006, investors were flocking to buy real estate that dramatically dropped in value in the course of a few years. The best investments are those that have proven to be successful over a long period of time. Check resources like the Value Stock Guide best stocks list and use the information you find as a starting point for additional research.

If there were a complete road map to investment success the financial market would be flooded with investors. However, there is no road map and your chances of success are just as good as everyone else's. Everyone has their successes and failures, but if you follow these 5 basic rules then you will have more successes than failures.

About the Author: Marcel Ahlm is a personal finance advisor who recently began building his own investment portfolio. He spends a great deal of time talking to investors, researching, and watching current trends.

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