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Portfolio FAQs

1. How do I begin building an investment portfolio?

The basic steps are:

  • Identify your investment goals - emergency savings, retirement, educational expenses, etc.
  • Determine the time frame for each goal.
  • Figure out how much you'll need to invest in order to meet each goal.
  • Choose the investment appropriate to each allocation.
  • Monitor and evaluate your portfolio periodically.

2. Why should I maintain a well diversified portfolio?

Essentially, diversification means not putting all your eggs in one basket. By dividing your money among different investments, you can help reduce the impact of poor performance from any one investment. Let's say you want to diversify your investment portfolio. You might decide to put some of your money in stock investments, but also a portion in short term investments and another portion in bonds. Because these three categories generally perform differently during economic cycles, strong performance in one or two categories may offset poor performance in a third.

3. How often should I review my portfolio?

Any time your investment goals or financial circumstances change, or when economic conditions shift, you should take a look at your portfolio and see if it needs to be updated. Even if these factors haven't changed, it's a good idea to review your portfolio at least once a year. When reviewing your portfolio, consider these two points:

PERSONAL GOALS. How is your portfolio performing from the viewpoint of your personal goals? Are you comfortable with any price fluctuations that may have occurred? Are you getting the results you expected?

BENCHMARKS. How are your investments performing compared with others in the same category? If your stock fund is down 2%, it may not seem like a good performer. But, if the stock market as a whole is down 7%, that could change the picture. Similarly, a stock fund that's up 12% may look terrific, but not if the market is up 20% over the same period.

If you find yourself unhappy with the results of your investing, or uncomfortable with fluctuations in the value of your portfolio, you may want to go back to the questions you asked yourself when you were first planning your investment strategy. Do the same answers still apply?

Remember, fluctuations in investment value are a fact of life for stock and bond investors. The stock market can be down for periods of a year or more. That's why it's important to match your investment portfolio to your time frame, and also to consider your feelings about risk.

4. How important is it for me to have mutual funds in my portfolio? Won't stocks and bonds suffice?

There are several benefits that mutual funds provide in lieu of holding simply stocks and bonds:

Diversification - By holding a variety of investments, mutual funds provide built-in diversification. This is achieved by investing in a wide range of securities, asset classes and geographic regions.

Flexibility- As your investment objectives change, you may transfer all or some of your holdings from one fund to another, usually at no cost.

Professional Money Management - Mutual funds are managed by full-time industry professionals.

Liquidity- Mutual funds are bought and sold easily. This can be done on just about any business day, and the cash value of a redemption is usually received within a few business days.

5. How important is the concept of asset allocation to my portfolio?

Asset allocation can help you avoid being too heavily concentrated in one particular area when markets fluctuate. It is the specific mix of investments in your portfolio; stocks, bonds, and cash. Being too heavily invested in long-term bonds can be disastrous when interest rates rise, and having too many equities during market downturns can be equally destructive. By taking the advice of a financial planner and using allocation tools, you can enhance returns and adhere to your personal risk tolerance levels.

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