Building an investment portfolio? Here's how to diversify

Building an investment portfolio is a big part of securing your financial future. But it's not as simple as buying shares in a company and sitting back to watch the returns come in. Diversifying your assets by investing in cash, equities, bonds, and property is the best way to manage your risk while still being confident in your potential returns.

Diversifying by blending asset classes

Having a plan of which assets, how much assets and where you'll invest them (an 'asset allocation strategy') is key to putting together a strong investment portfolio.

In other words, you may want to invest different percentages of your money into all four asset classes. Your asset allocation will depend on your risk tolerance, investment goals, and investment timeframe. By diversifying your portfolio, you'll be able to balance the risk of your investments with the potential returns you may earn from them.

If this seems confusing, here's an example. If you are an investor with a high-risk tolerance and a long time period to invest, you can invest more in equities and less in cash. More cautious investors with a shorter investment period (less time to invest) might prefer investing mostly in bonds and cash, which are less risky in the short term.

How to construct your portfolio

Once you've decided what you want to invest in, you should be ready to start constructing your portfolio. These steps can help you along the way.

1. Identify your goals

A financial adviser can help you with this part of the process. They'll consider your age, how long you have to grow your investments, the amount of capital you want to invest, and your future income needs. Together, you'll be able to determine realistic investment goals.

2. Understand your risk tolerance

Your risk tolerance (also known as risk appetite) refers to the amount and level of risk that you're willing to accept while pursuing your financial goals. You'll need to make sure that your risk and return objectives match your investment plan. Your financial adviser will ask you questions to try to assess your willingness to take risk, and so determine which assets you should invest more in.

3. Allocate your assets

Once you've gained a better understanding of your current situation, future income needs, and risk tolerance, you'll be able to decide how to allocate your investments among all four asset classes.

4. Review your portfolio

Your risk tolerance and timeframe will change as you get older, so it's important to regularly keep track of your portfolio. Your financial adviser can help you change your asset allocation over time to make sure your financial needs are still being met.