One of the focuses of our firm is to help our clients design a diversified portfolio. As the year comes to a close and you spend the next month or so thinking about 2021 and/or planning for 2022, your plans should include designing a portfolio to meet your goals.


Designing a portfolio is more than understanding the fundamentals of investment planning. It also entails creating a diversified portfolio of various assets that can be used to reach your financial goals sooner rather than later.


What is meant by “designing an investment portfolio”?

Designing an investment portfolio is the process of determining which investment vehicles will help you pursue your personal goals.

First, you’ll want to identify the personal investment goals that you would like to fulfill. These goals will be closely tied to a number of factors, such as liquidity needs, time horizon, and risk tolerance.

Second, match your goals to the proper investments, commonly referred to as asset allocation. This will result in a portfolio design suited to your investment needs.

Once you have settled on a portfolio design, you can properly construct an investment policy, implement the portfolio design, and manage your portfolio.

Identify goals

One of the first steps in designing an investment portfolio is to identify your personal investment goals. Are you saving up to buy a house?

Perhaps you would like to start planning for your child’s college education, or maybe you want a head start on saving for retirement.

The goals you would like to achieve through investing will depend upon factors such as your liquidity needs, time horizon, and risk tolerance.

Liquidity needs

Liquidity usually refers to how fast you can convert your investments into cash (or its equivalent). Real estate investments, for example, tend to be very illiquid. By comparison, publicly traded be fairly liquid. Liquidity needs refer to when you will actually need the cash from your portfolio.

For example, if you are saving money for retirement 30 years in the future, your near-term needs may not be very large. However, if your child is starting college in a year, you will obviously need some or all of the assets in your portfolio within a very short time.

As a result, you may want in your portfolio the type of investments that can easily be converted into cash.

Time horizon

A second factor, which goes hand in hand with investment goals, is your investment time horizon. To find out your investment time horizon, determine when you will need the money. Are you investing for your young child’s college education?

Are you investing money for retirement 30 years in the future? Are you investing to buy a house in 3 years? The length of time that you plan to remain in a particular investment vehicle is referred to as your investment planning time horizon and will have a significant impact on the types of investments that you purchase.

The general rule is: The longer your time horizon, the more risky (and potentially more lucrative) investments you can make. Many financial advisors believe that a longer time horizon gives you more time to ride out any market fluctuations.

Therefore, investments such as common stocks or real estate may be appropriate for you if you have a long time horizon.

On the other hand, if your time horizon is very short, you will probably want to concentrate your investments in less risky vehicles, such as money market funds, Treasury bills, and other fairly conservative investments. With a short time horizon, you simply don’t have time to recoup losses.

Risk tolerance

The definition of risk tolerance is twofold. It describes an investor’s capacity for risk (i.e., how much money can he or she afford to lose). It also describes just how comfortable an investor is with risk.

This depends on many factors–objectives and goals, life stage, personality, knowledge, and investment experience. Your risk tolerance will play a major role in the types of investments you choose for your portfolio.

In order to determine your risk tolerance, you might want to start by considering some basic questions. What type of investor are you? Are you comfortable with risk? In other words, given the unpredictability of market fluctuations, how much of a portfolio drop could you handle without hitting the panic button?

Maybe you can tolerate a greater amount of risk in the hope that you’ll make out with a better return on your investment. Or, are you the type of person who is going to get nervous every time there is a market drop? What are your investment goals?

Are you investing so that you can buy a house in a couple of years, or are you planning for your toddler’s college education? By answering these types of questions, you will have a general idea of your tolerance and capacity for risk.

Asset allocation

Once you have determined your investment goals, the next step in designing your portfolio is to select the investments (e.g., stocks, bonds, and cash alternatives) that will help you meet your goals, commonly referred to as asset allocation.

For example, if you are creating an investment portfolio to save for your retirement 30 years in the future, you may want to select investments that have the potential for significant long-term gain (e.g., growth stocks).

Conversely, if you are creating an investment portfolio to purchase a house in 3 years, you may want to fund the portfolio with more conservative investments such as Treasury bills and money market mutual funds.

The underlying principle of asset allocation is that different categories of investments have shown different rates of return and different levels of risk and price volatility over time. By diversifying your investments over different asset classes, you should minimize risk and volatility.

We’re in the home stretch and the last month of 2021. You may have your hands full with a to-do list that keeps getting longer, there is one thing you should consider doing if it’s not already on your radar.


Invest in real estate right now.


This time of year is the perfect time to purchase an investment property.




More Inventory

First, most people are focused on other matters right now so the inventory of properties will be better now versus other times of the year. This means that you may be able to get a better deal on a property right now.


Tax Deductions.

Second, if you buy the property now, you can take advantage of a number of tax deductions before the year closes out. Whether it’s closing costs, fees paid to a property manager or repairs, there are a number of deductions available to buyers.


You may be wondering why you should invest in real estate in the first place. It’s one of the asset classes we recommend to clients as part of a fully diversified portfolio.


Real estate can potentially serve as a hedge against inflation. Returns typically are derived from capital gains, tax credits, and/or rental and lease income.


There are many ways to invest in real estate. Direct investment typically involves the purchase, improvement, and/or rental of land or buildings.


Indirect investment typically involves the purchase of shares in an entity that invests in real estate, such as real estate investment trusts (REITs), mutual funds and exchange-traded funds that invest in real-estate related stocks and/or REITs, and real estate limited partnerships.


Reasons People Invest in Real estate


1. Potential portfolio diversification

Real estate is considered an alternative asset class: an investment that may behave very differently from such major asset classes as stocks, bonds, or cash alternatives.


For example, because location is such an important factor in determining the value of a real estate holding, local economic conditions can be just as important as what is happening in the national real estate market.


As a result, having a portion of your overall net worth in some sort of real estate investment–including your home–can help diversify your portfolio.


However, remember that diversification alone cannot guarantee a profit or protect against the possibility of loss, and there have been times when the real estate markets and other markets have had a substantial impact on one another.


2. Potential to hedge against inflation

Real estate can be a tool for at least keeping pace with inflation. When prices rise, real estate values often rise as well, in part because the cost of the raw materials that go into construction is increasing.


However, the opposite can be true as well; a general decline in prices is likely to affect the value of land, homes, and other buildings, as well as the income stream from rentals.


3. Pleasure of ownership

In some cases, such as a primary residence or a vacation home, real estate ownership can represent a way to enjoy your investment.


Many homeowners view their homes as providing not only a financial benefit but also the tangible psychological benefit of pride of ownership.


4. Potential for significant gains

Real estate investments can have the potential for significant gains if the property can be developed and sold for substantially more than its original value.


A barren strip of desert can be converted into an entertainment mecca. A remote tract of woodland can be developed into a large subdivision of homes. An old abandoned factory can be converted into luxury apartments.


However, such gains often require significant initial outlays of cash, experience, and favorable circumstances.


5. Can provide a stream of income

An investor can enjoy a stream of income when rental and lease payments exceed the property’s operating expenses and debts.


6. Can allow you to take advantage of certain tax credits

There are a number of tax credits available to real estate investors. Most relate to investment in low-income housing or the rehabilitation of certain types of property.


Such investments can further legislative interests while providing an investor with certain tax planning tools that might not be available with other investments.


How to Invest in Real Estate


Numerous ways to invest

Real estate can be purchased either directly or indirectly in many forms including shopping centers, industrial buildings, apartments, condominiums, single-family residential housing, and raw land (see last week’s post about how to invest in raw land).


Each type may offer different potential advantages, so it’s possible to diversify the real estate component of your holdings.



Pursuing a real estate investment

Choosing a real estate investment involves doing some research.


First, read about the different types of real estate investments and determine whether investing in real estate is right for you.


Decide whether you have (1) the financial resources to invest in real estate, (2) the temperament to accept the associated risks, and (3) the knowledge and experience to make sound real estate investments on your own. If not, consult additional resources and seek the advice of a trusted advisor.


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