Successfully building and managing your financial portfolio (a collection of financial investments chosen by you or a financial advisor) means following these steps in asset allocation’s top-down, systematic approach:
Decide on your investment strategy.
How conservative or aggressive should you be? For help, you may want to ask a financial advisor. Then commit to your strategy by writing it down in an Investment Policy Statement.
Figure out your asset allocation.
Your investment strategy informs your asset allocation. First, decide on the asset classes and subclasses you want to use (your asset baskets), which include cash, fixed income, equities, and alternatives (such as real estate and commodities). Then determine how big each of these baskets should be.
Fill your asset baskets.
Start filling your baskets with specific investments — stocks and stock funds, bonds and bond funds, cash equivalents, real estate investment trusts (REITs), and commodity index funds. While filling your baskets, put higher-taxed (tax-inefficient) investments in tax-deferred accounts and lower-taxed (tax-efficient) assets in taxable accounts.
Rebalance opportunistically.
Rebalance when some of your asset allocation baskets begin to overflow. Redistribute the excess to the baskets that have become underfilled. Systematically selling high and buying low will keep you true to your asset allocation and generate increased returns over the long haul.
