Determining Asset Allocation
You need to pay attention to your individual financial position and investment goals first. Once you do this take into account your personality and risk tolerance. The possibility of greater returns comes at the expense of greater risk for loss. A younger person who doesn't have to solely depend on his/her investments for income can afford to take greater risk in the quest for higher returns compared to a 50 year old man/woman.
Divide Capital Across Assets
Choose stocks that satisfy the level of risk you want to carry in the equity portion of your investment portfolio. To shortlist potential companies you can analyse them using stock screeners. Mutual funds are available across a wide range of asset classes and allow you to hold stocks and bonds that are professionally researched by fund managers. Index funds have lower fees since they are passively managed.
Reassessing Portfolio Weightings
After getting an established portfolio, make sure to analyse and rebalance it properly since market movements may cause your cause initial weightings to change. This can alter your future needs, current financial situation and risk tolerance. In such a case you will need to rebalance and determine which of your positions are under weighted and overweighted. If your risk tolerance drops, you can simply reduce the amount of equities held, or you may be ready to take on more risk by allocating a small proportion of your assets to be held in small cap stocks.
After determining which securities need to be reduced at how much price, you need to decide which underweight security you will purchase with the proceedings obtained from the selling of overweighted securities. While doing this you need to think of taxes. If your investment in growth stock has appreciated strongly over the past year and you end up selling all of your equity positions to rebalance your investment portfolio, you may have to incur significant capital gain taxes.