IF YOU DON’T HAVE A SOLID foundation for your portfolio, how can you build and construct a strong portfolio meant to endure the years leading you to and through retirement? Like building an itinerary, a sound portfolio begins with where we want to go and how much time we have.

STEP 1: ASSET ALLOCATION
Asset allocation involves an investment strategy aimed at balancing risk and reward by apportioning a portfolio’s assets according to an individual’s goals, risk tolerance and investment horizon.

A typical investment portfolio consists of three traditional asset classes and, sometimes, a fourth alternative class.

A classic example is the blend of stocks and bonds which in “typical” market environments are negatively correlated. The combined return is the average of the two, but the risk is far less than the average since the two tend to offset one another, as one typically rises when the other falls.

The third leg of a more traditional asset allocation includes cash, and more recently investment managers are including a fourth, alternative investments which may include real estate, commodities, hedge funds and the like.

STEP 2: DIVERSIFICATION
The initial process of general asset allocation only provides a few broad strokes of diversification. Diversification itself, however, is the next integral step of building a portfolio, in which you determine the various asset sub-classes or economic sectors represented within each asset class.

Key sub-classes may include large, mid, small and international company stocks. Those categories can be further subdivided into growth or value stocks and specific economic sectors such as basic materials, health care and energy. Categories for bonds may include municipal and corporate bonds and can further be broken down by duration or credit-worthiness.

The ultimate decision of which asset sub-classes or sectors one should invest in is ultimately made by the needs of the investor. Is the investor tax-sensitive or tax-exempt? Is the investor looking for current income or seeking growth? For example, if an investor’s target allocation is determined to be 50 percent stocks and 50 percent bonds but the investor doesn’t want taxable income, perhaps non-dividend-paying growth stocks fit the bill for the stock portion and tax-free municipal bonds for the bond portion.

Once the allocation percentages have been assigned to each of these buckets, the buckets need to be filled with actual securities.

STEP 3: SECURITY SELECTION
Securities selection is the final step. At this point, individual securities, mutual funds or exchange-traded funds are usually identified and fit into each of the portfolio’s allocated buckets. This, however, can be the most complicated. This is where fundamental research comes into play to analyze which stocks, mutual funds or ETFs offer the most promise within a sector to which you want exposure.

Proper portfolio construction is both an art and a science. It requires the ability to apply long-term statistical data with discretion to adjust for current and anticipated economic conditions. As with all things financial, there is no one cookiecutter solution. Each individual investor must weigh a