Importance of a Full Investment Portfolio (& How to Build One)
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A portfolio resembles a pie with your financial assets as its filling. Your choice of filling reflects your interests and opens a window to your financial indulgences. Why should you take a close look at your portfolio?
What can a portfolio hold?
A portfolio holds stocks, bonds, cash and cash equivalents such as ETFs. It can also include other assets that retain value and are a part of a moving market in which they can be sold and traded, like gold, valuable art, real estate, cryptocurrency, and private investments.
What is the purpose of having a portfolio?
Portfolios provide a framework for your money. They help you oversee and manage your investments. A portfolio can help you diversify your assets and spread your risk across stocks, bonds, and other types of investments.
What goes into creating a portfolio?
There are a two key considerations when creating and maintaining a portfolio:
Risk tolerance: Your capability to tolerate the risk of losing money. By defining your tolerance to different levels of risk, you will be able to make reasonable considerations when it comes to the type of investments you make and which companies you invest in.
Time horizon: How long you're planning to hold certain assets for. You should consider the amount of time you have to own specific assets until you need to exit the market. Your time horizon can correlate to your age, time left until retirement, projected returns, and other factors.
What is the difference between buying stocks and building a portfolio?
Buying a stock refers to your decision to hold a share in a corporation after doing in-depth research about the stock and the company itself. When buying a stock, you have ideally considered all factors of the investment and found it to be worth the risk.
When it comes to building a portfolio, you don't only look at the performance of the stock in respect to itself or the company. You also take your other financial assets and risks into consideration. As a whole, your investment portfolio is a dynamic asset hat helps you build your financial empire.
Types of investment portfolios to consider
In aggressive portfolios, investors take a greater risk in search of high returns. Aggressive investors seek out companies that are in the early stages of their growth and most of them are not yet common household names. Stocks in an aggressive portfolio experience a higher fluctuation in price.
Stocks in a defensive portfolio are isolated from huge market fluctuations. In this type of portfolio, the strategy is to bring down risk. If you have a low-risk tolerance, you can build a defensive portfolio, by investing in companies that produce staples for everyday life and consumption.
Income portfolios focus on investments making money from dividends or other types of wealth distributions. Such portfolios include investments and assets in companies that return chunks of profit to their shareholders, thus, generating a constant positive cash flow.
Speculative portfolios carry the highest risk among all types of portfolio. This type of portfolio plays on initial public offerings (IPO) and stocks of technology and health care companies that are in the process of new breakthrough products that need funding.
A hybrid portfolio offers a great deal of flexibility. A hybrid portfolio allows you to indulge in other investments beside the stock market, such as investments in art and real estate. A hybrid portfolio offers diversification across several asset classes, consequently, resulting in stability.
How can you create and maintain a successful portfolio?
1. Determine the objective of your portfolio. What is your goal? What do you hope to achieve with your returns and wealth?
2. Diversify. Don't put all your eggs in one basket. A concentrated portfolio can be volatile and increases risks associated with investing. Diversification helps you balance loss and profit in market downfalls.
4. Minimize investment turnover. Try to decrease the frequency you buy and sell assets. This increases transaction costs. Plus, some investments take a longer period of time before they finally return profit. so staying invested for the long term is key.
5. Make regular investments. At the end of the day, it's your choice to invest in what you see important or worth your money. The most important thing is to invest incrementally on a regular basis. This will help you achieve your goals and won't put a strain on your liquidity.
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