When putting together an investment portfolio, it is important to keep track of the asset allocation.
Contrary to popular belief, investment portfolios don’t need to be complicated. If your financial goals are clear, it is possible to build a simple and effective portfolio. Every industry has its own jargon and investing is no different. In the financial world, the investment portfolio refers to the total invested assets of an investor.
If you are new to investing, the term investment portfolio can seem daunting. However, with little effort and the right advice, the whole process can be simplified. With the right advice from the financial advisor, the entire investment process can become a snap.
What is an investment portfolio? To define broadly, an investment portfolio is the collection of assets that an investor might have. It includes stocks, bonds, real estate, gold, etc. The investment portfolio classifies investment assets under one roof.
For example, an investor can have regular savings in a provident fund, other than that he can have investments in mutual funds. These accounts should be considered collectively when making investment decisions.
The best way to effectively manage an investment portfolio is to entrust its management to a professional financial advisor.
A lot of people invest at random. They do not have clear investment objectives. It’s wrong. You have to take your risk tolerance into account when building your portfolio. To many, risk tolerance is an alien concept, but professional financial advisers see it as an important factor when influencing investment decisions. Risk tolerance helps the investor assess their ability to manage volatility. For example, if one is investing for retirement, it does not make sense to react to volatility. Markets can see crazy swings in the short term, but in the long term gains and losses are offset.
Once the risk has been identified, the next step is to identify the investments. For someone who has their goal in five years, it makes sense to invest in debt funds because of the stability of returns. Likewise, a young person may choose to invest in riskier assets like pure equity funds.
When putting together an investment portfolio, it is important to keep track of the asset allocation. Many investors, in their enthusiasm, invest everything in short-term assets and panic when there is volatility. Determining how much to invest in each asset class is crucial in order to have peace of mind. Every investment should be made after carefully analyzing its financial goals.
Investment portfolios can be aggressive, conservative, or a mixture of both. It is not enough to create an investment portfolio. It is important to rebalance it at regular intervals. The sharp rise or fall in asset prices can disrupt the proportion of your portfolio. Most financial advisers recommend rebalancing the portfolio every six months or at least once a year. For example, if you’ve decided to allocate 60% to equity funds, and the markets go up 5%, it makes sense to give up some of your holdings and turn to debt or international funds. This ensures that the portfolio is not overly reliant on one asset class.
Finally, while building an investment portfolio is not rocket science, it is always advisable to seek advice from a qualified financial advisor to avoid frustration down the road.
(By Abhinav Angirish, Founder, Investonline.in)
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