What assets should be included in a portfolio and what sort of allocation to follow may be a rather tough decision to make, especially for novice investors. Setting yourself up for investment success involves many factors. But don’t you worry, we’ve got you covered: here’s your investment portfolio 101.
What is an investment portfolio?
Just like any other industry, the world of investing speaks its own language. One term that is often used without any explanation is “investment portfolio.” We bet you’ve probably heard about it, so what exactly is it?
Think of an investment portfolio as a safe. Figuratively, of course. Just as you might use a safe to store all of your important documents and valuables, an investment portfolio serves the same purpose as a set of all the financial assets owned by an individual or institution in order to grow in value or provide income. But unlike a real safe, an investment portfolio is more of a concept rather than a physical item.
The basic components of a portfolio
The types of assets that are included in an investment portfolio are known as asset classes. These can be:
Typically, an investment portfolio is well-diversified and will contain different types of assets. Most commonly, however, an investment portfolio will include bonds and stocks whose overall value fluctuates depending on market performance, providing long-term profits.
Moreover, you may run several accounts with various financial investments in them for different purposes – a brokerage account for stock trading and a pension plan for retirement, for instance. Additionally, the investor needs to make sure that there is a good mix of assets in the portfolio, so the balance is maintained, helping foster capital growth with limited or controlled risk.
Types of investment portfolios
As there are plenty of reasons and goals for investing, portfolios also come in various types and sizes, depending on the investment strategies applied.
When you invest in a stock, your investment returns can come from two sources: stock price appreciation and dividend payouts. An income portfolio is an investment portfolio that usually consists of both dividend-paying stocks and coupon-yielding bonds. It is more focused on securing regular income from investments as opposed to focusing on potential capital gains.
As the name suggests, a growth portfolio’s objective is to promote capital growth by taking greater risks, including investments in growing industries. A growth portfolio mainly includes companies with above-average growth that reinvest their earnings into research and development, expansion and acquisitions. Simply put, a growth portfolio primarily consists of stocks of younger companies that are expected to experience price appreciation in the future. Portfolios focused on growth investments usually offer both higher potential rewards and higher corresponding potential risk.
For value portfolios, an investor buys cheap assets by valuation. As another great investment portfolio example, it is especially popular and useful during unstable economic and political times when many businesses struggle to survive and stay afloat. Investors, meanwhile, search for companies with profit potential, but that are currently priced below what analysts believe their fair market value to be. That is to say, value investing focuses on finding bargains in the market as long-term investment allocations that have the potential to grow steadily over time.
How to build a winning investment portfolio
Simply understanding the definition doesn’t tell you much about how to build an investment portfolio. So here is what you need to know.
In order to build a perfectly suited portfolio that is tailored to your personal trading needs and goals, have in mind the following questions when getting started:
For how long do you want to invest?
When building an investment portfolio, it is extremely important to set the preferred time horizon, a period of time over which an investment is made or held before its liquidation. It can last from seconds to decades, depending on your trading goals. The longer your investment horizon, the more time you have to grow your investments and ride out short-term fluctuations in the market.
What are your goals?
Your goals play a huge role in determining your overall investment strategy. If you are interested in saving money for a deposit on a house in a shorter span of time, you should look for low-risk products that are easy to liquidate, as there would be little time to make up any losses. On the other hand, an investor willing to invest his entire portfolio in stocks will have years to play with, allowing to have a more aggressive portfolio.
A simple way of focusing your goals is to decide which category you fall into income, growth or capital security.
How much money do you have to invest?
After accounting for your household expenses, loan repayments, emergency savings and insurance premiums, you will have a rough idea of what you have available for investment. Don’t commit to investing more than you can comfortably afford in the long run. Also remember that most investments come with some costs, such as commissions, account fees and other charges.
How much risk can you take?
Risk tolerance can be influenced by several different factors, such as income stability, financial strength, portfolio size and even investor temperament. Your risk tolerance can impact your investment objectives, time frame and the actual size of the investment. Consider your personal short and long-term needs – if you have more immediate needs, take on less risky investments. Don’t take the risk if you don’t have the time to recover from your losses, and be extra prudent when performing risk management.
What should you invest in?
Investing involves seeking a balance between safety, liquidity and returns. One of the key recommendations is to diversify your portfolio. In doing so, you own different types of asset classes, helping to balance out the risks; protect against unexpected events in a given sector; sudden drops in the value of a single investment; and overall poorly performing investments. It ensures your portfolio performance isn’t too dependent on a particular asset. You can incorporate various financial instruments, such as CFDs or ETFs, as these offer an easy way to achieve diversification cheaply.
How often should you review your investments?
Review and re-balance your portfolio and its performance regularly as it will help you identify if the investments are on track to achieving your goals. You should also master the art of portfolio management, which includes matching and mixing investments and assessing the balancing risk against performance. It falls into two forms, active and passive. Active management involves attempting to beat the market return by managing portfolios based on thorough research and decisions on individual holdings, whilst passive management involves simple tracking of a market index. You should review your portfolio regardless of which management approach you decide to incorporate.
If you have products that are more volatile, monitor these more carefully so you can be ready to liquidate them in terms of the market’s downturn. Staying on top of current market trends and news can help you make timely decisions.
Last words? Have some fun with your portfolio. Don’t keep all the eggs in one basket – research, diversify, coordinate, and mix to match your own investment plan.
All you need to know about Investment portfolio:
Investment portfolio: everything you wanted to know but were too afraid to ask