Any investor who wants to create and grow their wealth should have an investment portfolio. Wealth building efforts are less likely to be successful if approached haphazardly, so building an investment portfolio is a great way to add the necessary strategy and intention to these efforts.
An investment portfolio, simply defined, is a collection of all the assets that an investor owns. It can be likened to a roof under which you house all your investments. A good investment portfolio will be diversified and contain a wide variety of assets such as stocks, bonds, mutual funds, real estate, fine art, gold, etc.
Types of investment portfolios
There are five main types of investment portfolios and they are built with the investor’s financial goals and risk appetite in mind.
The aggressive portfolio – This type of portfolio is specially designed for investors with a high tolerance for risk. Investments that fall into this category are high risk but also have the potential to generate high returns. High beta stocks are an example of this type of asset. They are more volatile and experience greater price fluctuation relative to the overall market.
The defensive portfolio – This category is intended for people who have a low risk appetite. Building a defensive portfolio usually involves investing in stocks of companies that will stay in business no matter what. These are companies that manufacture products that are important for daily survival.
The income portfolio – The goal of an income portfolio is to generate positive cash flow. This includes stocks that pay regular dividends and provide a stable source of income for the investor. An income portfolio can be a great addition to an investor’s salary or retirement income.
The speculative portfolio – This portfolio is also suitable for an investor with a high tolerance for risk. It is essentially a question of pre-empting actions that are likely to behave well. An example of speculative investing is an initial public offering (IPO) of a new tech company. Financial advisers generally advise against investing more than 10 percent of their investment funds in such assets.
The hybrid portfolio – The hybrid wallet, as the name suggests, is a combination of different assets. This portfolio encourages diversification and offers the investor a diversified portfolio that can include stocks, mutual funds, bonds, commodities, real estate and even art. This category of portfolio has the advantage of flexibility for the investor; it also reduces the negative impact of losses of an asset class.
How to start building an investment portfolio
Building an investment portfolio can seem like a daunting task, but it doesn’t have to be. The first step is to identify your financial goals. As financial analyst Bloomberg and Chief Investment Officer of Ritholtz Wealth Management LLC, Barry Ritholtz rightly points out: “When it comes to investing, there is no single portfolio. “
Identifying your unique goals will determine whether your money should be invested in short or long term investments. It will also predict what type of portfolio would be best suited to your needs. A portfolio designed for retirement will be different from a portfolio that aims to provide income over the next five years.
It is also important to assess your tolerance for risk. If you are risk averse, that means you are careful not to put your money at risk for promising rewards. Therefore, your money should be invested as safely and predictably as possible. However, if you have a high tolerance for risk, you are willing to take risks for the possibility of achieving better returns.
Once this step is completed, you will need to take an honest look at your investment skills, to determine if you can build a portfolio on your own or if you need the help of a financial advisor.
The next step is to decide on the asset allocation. How much of your money will go into each investment? How do you plan to balance your portfolio and continue to diversify over time? These are all questions that need to be answered and it is advisable to seek professional help for this step of the process.
In conclusion, the main keys to keep in mind when building an investment portfolio are to identify your goals, assess your risk appetite and speak with an expert. Immediate assistance is available to you as FBNQuest offers a variety of investment products and is available to offer advice to investors based on their risk appetite.