Building an investment portfolio

Ever notice how some things look and sound a lot more complicated than they really are? Take investing for example. The mere mention of words like portfolio and diversified funds fools plenty of folks into thinking that investing money is only for financial high-rollers. But you don't have to be a pin-striped Wall Street wizard to have an investment portfolio. In fact, if you care about your future, then you should have one.

What is an Investment Portfolio?

An investment portfolio is a record of your financial holdings--savings and checking accounts, certificates of deposit, 401(k) savings, individual retirement accounts, mutual funds, stocks, bonds, real estate, even the value of precious jewelry and ,artwork. There are some good reasons to build an investment portfolio. It not only provides you with money for your retirement or for your child's education, but also gives you the resources to buy that dream house, open your own business, or just live a debt-free lifestyle.

Steps Before You Invest

If you've never invested before, the financial experts say you need to save some just-in-case money. "Build up a cash reserve as a cushion for emergencies," says Darwin Yarborough, a Chicago-area financial advisor and division manager for Waddell & Reed Inc. "in case your car breaks down or you get a hole in the roof, and for opportunities, like a down payment on a home." This cushion should be stuffed with two- to six-months' worth of living expenses. So if you bring home $2,000 a month, your cash reserve should contain between $4,000 and $12,000. Yarborough adds that you should always keep this reserve in assets that are liquid, such as savings or money market accounts, so you can get to it easily.

In addition to building up a cash reserve, take full advantage of your company's investment plans, especially those that match your contributions, like 401(k), profit sharing and stock purchase plans. Also, make sure your insurance policies are current and offer sufficient coverage so if disaster strikes, your cash reserve won't be depleted.

Building Your Portfolio

After you create your cash reserve, contribute to your company's investment plans and address your insurance needs, you're ready to explore the wide world of investing. Many people begin and end their investment search at the local bank because they're afraid of losing money in the "risky" stock market. However; experts say those fears are misplaced.

"Historically, the stock market averages about 10-12 percent in growth," Yarborough says. "In the last five years, it has averaged close to 20 percent. Even though there are some risks in the market, in the long term, a person does well."

He adds that "safe" investments, such as bank savings accounts, CDs and money market accounts, can actually do your money more harm than good in the long run. "If you're getting a 2-3 percent return [with a savings account] and inflation is averaging 3 or 4 percent," he says, "and you still have to pay taxes on that return rate, then your real rate of return is only 1 1/2 to 2 percent. So being in so-called safe investments really puts you behind because inflation and taxes are eating up that money. That's why it's best to look at places that give a better return."

Experts say a mutual fund is a good place to start if you are a first-time investor. A mutual fund works by pooling your money with other investors' money. A fund manager then takes the pool and invests it in many-sometimes hundreds--of places, like shares of stock (portions of ownership in a company) and bonds (money you loan companies or the government, which is repaid with interest).

A major benefit of investing in a mutual fund is diversification, or having many types of investments.

Diversification reduces your risk of losing money because if some of the companies in the fund do poorly, the odds are in your favor that the profits made by the rest would off, et your loss and you still would make money.

Mutual funds are also good for first-timers because you don't have to be a Trump or a stock-market analyst to invest in them. A fund manager saves you the guesswork by investing your money (minus a small commission). Even better, you can invest in most mutual funds for as little as $50 down and $25 a month thereafter. Ideally, you should put aside at least 10 percent of your income for investments, and as you near retirement age, the experts say you should increase that amount to at least 20 percent. Also, every time you get paid, make sure to invest some of your earnings.

"We need to get into the habit of paying ourselves first--before the bills," Yarborough says. "If we pay ourselves last, what's left is very little, or nothing."

Although the investments you select for your portfolio depend entirely on your personal needs and goals, the important thing to strive for is diversity. Remember what Mama always said about putting your eggs in one basket? If you put all your savings in one company and it goes bankrupt, you're broke. Or if you stash it all in an account that pays a miserly return, you cheat yourself of future wealth. The key is to find the right mix that keeps part of your money always available for short-term or emergency use, and part of it invested in places that will increase your wealth and financial stability in the long term.