‘Investment Portfolio’: How to Build it efficiently?
Investment – Before we understand the definition of Investment portfolio, what is an investment? An investment is a process, where you put a certain amount of money as capital and earn profits from that capital. The profits arising from investments can be in the form of interest, dividends, capital gains, etc.
There are many types of investments such as Stocks, Bonds, Bank Deposits, Real Estate, Cryptocurrencies, and many more financial instruments.
Investment Portfolio – An investment portfolio is something that contains all your investments, which isn’t something physical but more of a concept. Imagine you had an apple, an orange, two bananas, one guava, and a pineapple. Now, the information about these fruits, i.e., types of fruits and number of fruits within each type, can be called a portfolio. Similar to this, the information about the investments and the money put in each type of investment can be referred to as an ‘Investment Portfolio’.
Types of Investment Portfolios – We now know what an investment portfolio means, moving forward, let us have a look at some of the major types of investment portfolios.
- Aggressive Portfolios:
As the name itself suggests, this type of portfolio consists of an investment strategy that is very aggressive, which means, the individual will be concentrating highly on the huge gains regardless of the risk involved.
In this type of portfolio, if we take stocks as an example, they will have a high volatility with respect to the market. These types of stocks can have huge fluctuations in their respective prices and may even provide twice the profits of a normal stock or even more than that.
Aggressive investors are the people, who are in the prime of their age and try to get rich quickly. Moreover, they try to have rapid growth in their financial career by paying very little to no attention to risk management.
If a person can deal with the consequences of aggressive investing, then it can be a good choice, especially when they are young and want to gain more profits. They should also manage the risk efficiently as too much risk can result in the loss of the entire money that has been invested.
- Conservative Portfolio:
This is the exact opposite of an aggressive portfolio, where the individual won’t be opting for making an investment in highly risky stocks. Usually, this type of portfolio would contain stocks or any other assets that would perform well regardless of many factors that influence their performance. For example, investing in the companies that make products necessary for everybody to get along with their daily life (staples) is a good option for this type of portfolio.
Additionally, some of those stocks also offer dividends, which helps in coping with the capital losses (if any). Some other suitable investment options include bonds, retirement accounts, fixed deposits, etc. Most investors often go for a defensive portfolio, as they consider it to be one of the best types of portfolios. It has also been stated by many financial experts that a conservative portfolio with a buy-and-hold strategy is proven to be highly advantageous.
- Income Portfolio:
Income Portfolio concentrates on investment options that generate profits in the form of dividends or any other similar distributions to the shareholders. Some of the investment options in this type of portfolio are also a good match for the defensive portfolio as well. However, most of the assets in an income portfolio are mainly chosen for their ability to have higher yields.
Some of the best investment options for this type of portfolio are REITs (Real Estate Investment Trusts), MLPs (Master Limited Partnerships), etc. The primary objective of an income portfolio is to look for high dividends along with capital gains. An income portfolio is best suitable for the people who want something additional to their paycheck or retirement income.
- Speculative Portfolio:
It can be compared to something like gambling because a Speculative Portfolio primarily focuses on investment options having a huge amount of risk. Adding to that, no other portfolio can be as risky as a speculative portfolio. Some of the investment types that could be included in a speculative portfolio are Initial Public Offerings (IPOs), Futures, Forex, leveraged ETFs, and others like these.
In simple words, a speculative portfolio would consist of assets that are to be traded on a frequent basis to earn profits instead of buying and holding to those. Therefore, this type of portfolio requires a lot of time and effort from the investor along with some in-depth research on the assets.
- Hybrid Portfolio or Tailored Portfolio:
A Hybrid Portfolio is a type of portfolio that is tailored on the basis of your own financial requirements. You could throw in a few stocks or bonds for the long term, opt for few others assets for dividends, and even trade regularly. Everything depends on your interests and requirements.
An Ideal Portfolio – Depending on what most investors and financial experts have to say, it is highly advantageous to have a diversified portfolio, which consists of various types of assets. Let us have a brief look at how an ideal portfolio would seem like.
- List your financial goals:
It helps a lot to create an investment portfolio when you are focused on your specific financial goals. List out your short-term and long-term financial goals so that you will know how much you need to gain in the form of profits for achieving those goals.
Short-term goals can be something such as buying a car in two or three years, while long-term goals might be something like a retirement plan. Decide what you need the money for, and then work towards it.
- Risk Management:
Calculate your risk tolerance. If you are in your twenties and have a substantial amount of wealth, then you could choose an aggressive investment portfolio. If you are a middle-aged person and want something extra along with your regular income so that you can have a nest egg, then you could choose an income portfolio. If you are near your retirement or retired, then you should go for a conservative portfolio as you should not involve with risky investments.
- Asset Allocation:
After that, you need to allocate the capital into various assets according to your financial strategy. For example, you can choose to put more money into bonds, bank accounts, and some blue-chip stocks if you want to be conservative. You can go for highly volatile stocks, cryptocurrency trading, Forex, etc., if you are interested to have an aggressive portfolio. Asset allocation is an important part of building an investment portfolio.
- Manage your portfolio:
After allocating the assets, you should not think that everything is done, and you simply have to wait for the money. In fact, the process just begins after the asset allocation. You would have to regularly monitor your assets and reallocate assets based on certain types of factors such as your risk tolerance.
Bottom Line – In order to achieve your financial goals, building an investment portfolio is highly important and you should build one according to your financial situation. You should always consider the fact that your investment portfolio would also impact your life along with that of your family.
Therefore, you should also keep some money aside for purposes such as rainy-day funds, medical emergencies, children’s education, retirement, etc. We also hope that you can build a good investment portfolio with the help of the information provided in this article.