5 things to consider when building your portfolio



5 things to consider when building your portfolio

Confused businessman
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Today's investors are inundated with a surplus of investing information, which can make it more difficult to successfully construct an investment portfolio. What's more, each and every person looking to invest has his or her own set of individual needs that call for special consideration.

"It's important that investors understand their goals, tolerance for risk and, increasingly, the basics of active and passive investing styles," said Brian Smith, director of the Mutual Fund Education Center in Kansas City, Missouri. "A little increased knowledge goes a long way, enabling them to successfully partner with an advisor to achieve the best possible outcome for their investment future."

Following these five considerations compiled and supplied by the Mutual Fund Education Alliance, investors can take steps toward achieving their financial goals with greater ease.

— By CNBC's Kenneth Kiesnoski
Posted 10 October 2017

  • Who — and why?

    MFEA identifies three types of investors — self-directed, assisted and delegators — and the difference lies in their approach to portfolio construction. Self-directed investors take on all investment responsibilities themselves, assisted ones handle implementation but pay consultants for research and advice, and delegators take a hands-off approach. It's important to make this distinction, because who constructs your portfolio will directly affect investment outcomes.

    Source: MFEA

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  • Balancing active and/or passive

    Both active and passive mutual funds provide important benefits. Portfolios that include both passive and active options can be highly complementary, offering the opportunity for results in excess of indexing along and/or for navigating market risks more effectively.

    Source: MFEA

    Scales rebalancing
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  • Know your index ... and risk level

    Investors holding a large number of names to mitigate risk may be overlooking the fact that an index approach requires holding some of the riskiest individual names in the market. Know and understand what you are being exposed to when purchasing an index.

    Source: MFEA

    Olivier Le Moal | iStock | Getty Images
  • Cover your bases

    Historically, active and passive product performance swings back and forth cyclically. Because of this natural flux, it's helpful to create a balanced portfolio through a blended approach.

    Source: MFEA

    Pete Pattavina | Getty Images
  • Be flexible

    When the pendulum swings in the market, active managers' ability to sell over-bought, exceedingly pricey shares before they collapse is advantageous. This investment strategy gives these same active managers the opportunity to buy over-sold shares on the cheap, enabling them to potentially outperform through down and up markets.

    Source: MFEA

    Flexible spending account
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