Constructing an investment portfolio

If one had the perfect investment, four characteristics that it might include are safety, growth, income and liquidity. The problem is that as your investment dollar moves toward one of those characteristics, it generally moves away from another.

For example, you might try to double your money with a growth stock. However, in moving toward growth, you move away from safety. Conversely, you could invest all of your money into a FDIC-insured bank account. That might be considered safe, but there is no growth opportunity above the stated amount of interest.

Likewise, checking accounts and money markets provide liquidity, but the income is generally lower than long-term certificates of deposits.

Since there is not one perfect investment, the objective is to attempt to create a perfect portfolio, for each of your financial goals, whereby those portfolios provide adequate safety, growth, income and liquidity. Of course, there is no such thing as the absolute perfect portfolio, and different investors will have different opinions about what that portfolio should look like. Nonetheless, here are some thoughts about how to construct portfolios for common financial goals.

Emergency funds are established to provide for unplanned expenses that require rapid payment. Such occurrences might include the loss of a job, car repairs, and insurance deductibles for health problems and property damage. The primary characteristics for an emergency fund portfolio include liquidity and safety.

Growth or income are secondary factors because you will want these portfolios to keep up with inflation. Common investments However, I suggest some caution in using these funds. The reason is that people with the same target retirement date may have very different financial goals upon retirement. For example, a wealthy retiree may want to defer drawing income from a 401k plan because the withdrawn income becomes taxable. Therefore, rather than selecting a target date fund based upon the date that one plans on retiring, I recommend selecting a target date fund based upon when the money will be withdrawn.

For my final comments, I would add that income taxes can make a big difference on your investment results. There is a myriad of investment options for college savings and retirement plans that may provide tax advantages. Also, pay attention to costs and depending on your circumstances you may not want to tie up your investments in something that has long-term withdrawal penalties.

With other financial goals, such as saving for a down payment on a house or taking an expensive vacation, pay close attention to the time frame of the investment. As the time frame shortens, become more conservative with your investments. In the end, realize there is no such thing as the perfect investment nor the perfect portfolio. With each of your financial goals, tailormake the solution so it fits you.

This article was written by Ken Levy, a certified financial planner professional and a principal with Levy, Daniel & McGee Wealth Management. The opinions expressed here reflect the judgment of the author. Wells Fargo Advisors Financial Network does not necessarily endorse, and is not affiliated with, any of the institutions mentioned in this article.