Personal Investing: The Missing Manual

Chapter 9. Manage Your Portfolio

You invest because you want your money to work hard to help you reach your financial goals. Low-return, low-risk investments won’t grow your nest egg to where it needs to be. But high returns come with the risk of large losses. So, crafting a successful investment portfolio is a balancing act between return and risk.

“Don’t put all your eggs in one basket” is sage advice, whether you invest in stocks, bonds, real estate, or (especially) Fabergé eggs. If you dump all your dough into one investment, you could win big or you could lose it all. Sadly, regardless of how carefully you choose investments, you won’t pick a winner every time. The simple solution to earning a decent investment return without risking everything you’ve got is asset allocation, that is, investing in different types of investments (stocks, bonds, funds, and real estate, for example) in your portfolio at the same time. You can diversify your portfolio further by diversifying each type of investment within your portfolio. For example, in the stock portion of your portfolio, you might invest in firms of different sizes, industries, sectors, or geographic regions.

Of course, you have to build an investment portfolio before you can manage one, but the two tasks are similar. This chapter starts by giving you an overview of returns and risks for different types of investments. Then you’ll learn about asset allocation, investing portions of your portfolio in different investments to obtain ...