Do you know why men don't ask for directions? Because we don't. Building a travel itinerary can seem like a mundane and unnecessary task in preparation for a long journey but a contingency plan might help get you back on track should you lose your way. Getting lost because of poor navigation could cost you more than an hour of driving.

Similarly, in the case of your investment portfolio, making a wrong turn could cost you years of appreciation. Preparation precipitates good fortune. In my experience, some of the worst portfolios I've seen are those created by the do-it-yourselfers. There have been some whoppers: disconnected investments, liquidity issues, too little risk, too much risk, improperly titled accounts, unnecessary tax liability and finally "investments" that are not registered securities. (For more, see: Achieving Optimal Asset Allocation.)

It shouldn't surprise you that these are educated people too, some of them highly so. Knowing which direction to travel into the water does not make you an expert swimmer. It simply means the further you travel in that direction the stronger swimmer you'll need to be to find your way back. What many DIY-ers fail to recognize are some of the principles surrounding comprehensive portfolio creation. Let's look at some of the pillars before you begin raising the investment roof.

Before You Start

1) Purpose Your Money: If you're like most of us, money has a purpose such as retirement, college, new home purchase, etc.  Be specific. What are you using this money for and how much will you need? When will you need to use this money? 

2) Suitable Risk: What type of risk you put on this money will likely be directly proportionate to the expected return. Wherever you invest money, there is a chance you could lose money. What is an acceptable level of risk for you as an investor? Does your acceptable level of risk correspond to your purpose and expected return for this money? (For more, see: Five Things to Know About Asset Allocation.)

3) Tax Treatment: Don't be surprised, the government will take their share. "That's my money. I don't have to pay taxes on it." The Internal Revenue Service (IRS) says you do. As a professional, I've actually had that conversation more times than I'd like to admit. Taxes cannot be avoided but an investor should know how to properly navigate the tax treatment of their investments.

4) Properly Titling Accounts: How an account is titled can drastically affect how the money will be used later and passed to another in the event of your untimely departure from the DIY-er realm of investors. Make a mistake here and it could cost you tens of thousands of dollars. Once an account is titled you'll not get any sympathy in this industry if you've made a mistake. (For more, see: Diversification: Protecting Portfolios from Mass Destruction.)

That's a good beginning to our structure and necessary in determining a direction for any investor. You'll need a backbone to your investment structure. Then, once you've purposed and defined your investments, you'll be ready to start deciding on how to allocate your investment choices. How you allocate your profile depends on your comfort level with certain types of investment products. You'll have many asset classes to choose from. It may be helpful to select the products in which you have the most understanding. Modern Portfolio Theory is one tool most investors have when it comes to understanding risk/return and portfolio construction and whether to adopt a 90/10 aggressive portfolio, 80/20 or 70/30 growth portfolio, 60/40 moderate growth portfolio or a 20/70/10 conservative (stocks/bonds/cash) portfolio. This basic approach is a principled one and could serve you well. 

Diversification Above All

Proper diversification is something you'll want to consider when selecting investments. Investments are broken down into categories like size, style, and foreign or domestic. Understanding the corresponding risk level with each investment will be important when selecting the percent composition for your portfolio. For instance, a 45% allocation to foreign small-cap growth stocks might not be a bad place to be but that might not be true for someone who is purposing this money to be used in the next three-to-five years.  (For more, see: The Importance of Diversification.)

Consider Current Conditions

Current economic conditions could impact your portfolio composition in sharp contrast to a traditionally-styled portfolio. Let's consider rising rates. Mid- to long-term bonds have typically been a safe place for the last three decades. But that might not be true for an investor who is two years from retirement and is currently allocated 60% to mid- to long-term bonds in a rising interest rate environment.   

Stay the Course

DIY-ers will have to manage the fear mongering that has become so commonplace with our major market news channels. Trading during volatile times created by current events like what we've experienced around the world as of late could be a huge detriment to your portfolio. Moving money in and out of the market frequently is ill advised. Make some rules for your investment approach and don't deviate from that principled, unemotional approach. Yes, it's easier said than done - even for professionals. (For more, see: Portfolio Management Pays Off in a Tough Market.)

Stick to Your Process

Put a plan in place and stick to it. Create contingencies in the event things get unmanageable. Consider sound independent research and I don't mean from your television. If you do, you'll likely be disappointed. Most TV spots are for ratings and fear mongering, not for comprehensive investment advice. Spending some of your hard earned money for some investment advice from a bona fide research firm may help to tilt the odds in your favor. Create a rules-based approach to managing investments. When to buy, when to sell, desired returns and acceptable losses are some categories to consider.  

Always Continue Learning

Educate yourself on the industry. Research topics that interest you. Nothing beats passion when it comes to spending time caring for your investment portfolio. Never do anything you're not comfortable with. There are so many places to get information. (For more, see: A Guide to Portfolio Construction.)

The Bottom Line

Start with your foundational pillars and purpose your money. Get your investor ID. Who are you as an investor? Make a road map. Stay abreast of the changes to our economy. You just might learn how to take advantage of the information you're filtering. As always, don't let yourself be bogged down. If it gets to be too much, consult a professional. Don't be surprised if they don't work for free when you ask for advice. (For more, see: Asset Allocation Strategies.)

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Asset allocation does not ensure a profit or protect against a loss. Past performance is no guarantee of future results.