Whenever the world suffers a recession, only people with a good investment portfolio ride the turbulent waves like Gabriel Medina. A good investment portfolio contains a selection of investments that are tailored to your investment personality and expected outcome. This portfolio can also include assets like art or real estate, but common choices include mutual funds, exchange-traded funds and bonds. An investment portfolio can be likened to a beautiful basket filled with a variety of fruits selected according to the owner’s taste. It is all your assets under one metaphorical umbrella.
COMPONENTS OF INVESTMENT PORTFOLIO
“What makes up an investment portfolio?’ is one of the questions that most people ask when they first encounter the term. Its components are as follows;
- Individual Bonds: A bond is an interest-bearing security that obligates the issuer to pay the bondholder at specific intervals a specified sum of money, known as a coupon. They also pay the principal amount once the loan matures. For more about what bonds are, kindly click here.
- Cash: Cash is simply a legal tender that can be used for the exchange of goods, services and debt settlement.
- Mutual Funds: This is an investment pool made up of money gotten from many investors to invest in securities like stocks and bonds. A mutual fund can be stocks only, bonds only or a fine mix of both.
- Individual Stocks: This is simply purchasing ownership. Here an individual purchases 100% of a company. You can also learn more about stocks by clicking here.
- Individual Real Estate Properties: Real estate is simply the land along with any permanent improvement attached to it.
TYPES OF INVESTMENT PORTFOLIO
Investment portfolios can be grouped according to the expected outcome and investor’s risk tolerance.
A. Investment Portfolio Types According to Expected Outcome and Intent
- Growth portfolio: This type of portfolio is designed to deliver growth. To do this effectively, it takes great risks to ensure that the rewards are very significant. Growth portfolios typically offer both a very high potential reward and a concurrent high potential risk.
- Value portfolio: Simply put, value portfolios are designed to spot value and find bargains in times of distress. They are especially useful during difficult times in the economy. During times like this, many businesses and investments struggle to survive and stay afloat. An investor takes advantage of buying cheap assets that they believe will appreciate.
- Income portfolio: This Forbes article, describes an income portfolio as “a portfolio that consists primarily of stocks that pay dividends might be called an “income portfolio”. This kind of portfolio is more focussed on securing regular income from investments.
B. Investment Portfolio Types According to Investor Risk Tolerance
- Aggressive portfolio: This type of portfolio is designed for investors with a high risk investment personality. The rewards of this portfolio take time but are very high. The high risk investor is playing the long game so they are willing to weather the cost of a high reward. The infographic below by nerdwallet clearly illustrates this.
- Moderate portfolio: Moderate portfolios are designed for investors who like to take risks but will like to be a little bit conservative while at it. Although investing for a significant amount of time, it is not as much time as the high risk investor has. The infographic below by nerdwallet shows more percentage given to bonds as opposed to the aggressive portfolio. The medium risk investor aims for some degree of certainty of returns unlike the high risk investor who does not mind risking it all.
- Conservative portfolio: Here the investor wants a significant degree of certainty as they are investing for a short amount of time and have no room for risks.
STEPS TO BUILDING A PROFITABLE INVESTMENT PORTFOLIO
Asides knowing what an investment portfolio is, it is very necessary to know how to build one. To successfully build one has to;
- Determine The Aim of The Portfolio: Investors should be able to ask answer questions on what they want to achieve with the portfolio.
- Determine Your Investment Personality: This is very important. Recognising if you are a low, medium or high-risk investor will set the tone for the kind of investment goals you are comfortable with reaching for.
- Diversify: A successful portfolio has to diversify its investments. This helps investors a lot especially cases where some investments may be in decline, others may be on the rise. Rather than focus on one investment component.
- Minimize Investment Turn Over: Most times, investors like to buy and sell assets over short periods of time. While this can be okay, the side effect is that it increases transaction costs. Exercising patience and allowing some investments to take time will end up paying off.
It is important to note that building an investment portfolio takes time. Remember to tailor it to your investment personality and be sure to contact the services of an investment professional to help with this.