Course 501: Building a Portfolio, Part 1
Objective One: What Sort of Return Do You Need?
In this course
1 Introduction
2 Objective One: What Sort of Return Do You Need?
3 Objective 2: How Much Risk Can You Stand?
4 Measuring Your Risk Tolerance

You should have an idea of what sort of return you are hoping for from your investments. That figure should be derived from whatever your return objective, or goal, is, whether that's investing for your own retirement or for your child's college education. Ask yourself: What is the purpose of my portfolio? To gauge the returns you can expect from your portfolio, you can examine historical returns and estimate expected returns among asset classes such as stocks, bonds, and cash. The catch, of course, is that while historical returns are known with certainty, expected returns are best estimates or guesses. To estimate expected returns, you must go through a process called scenario analysis. In this process, you look at different return outcomes of a portfolio and assign the probability of those outcomes occurring. For example, look at the rate of return that an asset class might earn during different economic conditions--such as booming, steady, or recessionary--and then assign the likelihood of those conditions occurring. This will give you an expected return for your portfolio on the basis of how much you invest in each asset class. Many software programs do scenario analysis for you. Since expected return is especially difficult to quantify for short time periods, it's helpful to have a long-term goal in mind when you're talking about a stocks-only portfolio.

Next: Objective 2: How Much Risk Can You Stand? >>

Print Lesson |Feedback | Digg! digg it
Learn how to invest like a pro with Morningstar’s Investment Workbooks (John Wiley & Sons, 2004, 2005), available at online bookstores.
Copyright 2015 Morningstar, Inc. All rights reserved. Please read our Privacy Policy.
If you have questions or comments please contact Morningstar.