An investment portfolio is the set of securities held by an investor, i.e. assets characterized by different levels of liquidity and risk. The easiest way to do this is to divide your portfolio by percentage and assign each part to a specific type of investment. For example: 10% bonds, 20% Company A stocks, 35% Company B stocks, 7% Company C stocks, and 28% Company D stocks.
Investing is the art of selecting asset classes that provide the expected return at the level of risk accepted by the investor. The golden rule is to choose different types of assets for the portfolio, as diversification reduces the risk of losing some or all of the capital held. What is the said portfolio and what methods should be used by investors to properly select assets to maximize profits and minimize risks?
Investment Portfolio – Definition
The term “investment portfolio” should not be understood literally. The definition used in the financial markets states that it is a collection of assets that represent a form of investment of capital for future benefits, primarily property. You may also encounter many other interpretations of the term “investment portfolio.” It is a collection of an investor’s financial and real assets. The former may include stocks, bonds, or time deposits in banks. Tangible assets, on the other hand, are physical property owned by the investor, such as real estate, automobiles, etc.
You design your investment portfolio yourself by selecting suitable assets. The portfolio is subject to an evaluation of investment risk and expected return.
Types of investment portfolios
Investment portfolio is an ambiguous term and can refer to different groups of assets. In this regard, at least several types of investment portfolios can be distinguished. These include:
- Equity investment portfolios – which group stocks of companies with highly structured fundamentals. A characteristic feature of such portfolios is that the investor has to accept a higher level of risk, but this allows him to achieve a higher return.
- Safe investment portfolios – where the investment risk has been reduced to an absolute minimum. They contain, for example, bonds.
- Balanced investment portfolios – contain risky investments, such as stocks of companies with high growth potential, but also bonds, which compensate for the higher investment risk associated with stocks.
As an investor, you need to answer the question of what return you expect from your investments and what level of risk you are willing to accept relative to that. If you don’t want to take any risk, you build a safe investment portfolio so that your capital isn’t eroded over time. You put your money in bank deposits and buy bonds. You will earn less than if you invested in stocks, but you are virtually guaranteed not to suffer any losses.
What factors play a role in building a portfolio?
If you want to start building an investment portfolio, then you first need a securities account. But today, other providers also offer broad-based and technically advanced securities accounts. It is advisable to familiarize yourself with the methods that will allow you to choose the right assets for your portfolio to minimize risk and maximize profit. Among the factors you need to analyze are:
- historical returns
- the volatility of asset prices
- the degree of exposure to a major stock market index.
Proper construction of an investment portfolio determines future gains and the amount of potential losses. Responsible investing is not based on pure intuition, but on a solid foundation of investor responsibility and proper asset selection for the portfolio. Moreover, it can mean something completely different to each of us.
Before you start building a portfolio, you need to consider some of your own characteristics that will determine its future shape. You need to determine your level of risk acceptance, which will tell you whether you should invest more in bonds and deposits or perhaps currencies and stocks. Other factors that will influence the shape of your investment portfolio include the following
- Your individual financial and professional situation
- Personal issues, such as whether you have a family and dependents
- Your investing experience
- Marital status
Choose wisely so you can build a portfolio that meets your needs, requirements and expectations.
Investment Portfolio Management
Building an investment portfolio is an important stage of investing, but your responsibilities as an investor don’t end there. You still need to manage your portfolio properly, which means knowing when to divest from certain assets and when, on the contrary, to keep them longer. If you have good intuition, can interpret market signals, and at the same time listen to good financial advisors, it will be easier for you to maneuver so that only profitable assets are included in your investment portfolio.
One mistake that many investors, especially beginners, make is that they do not invest in, for example, stocks or mutual fund shares until they are making high profits. In the meantime, the best time to invest, especially in stocks, is when no one is interested in the asset in question. You can’t buy popular stocks cheaply and bet on an upward valuation rally, and with it – on the highest possible profits.
As part of your investment portfolio management, you should constantly monitor what is happening in individual markets. Keep up with the most important news and take an interest in the political situation of the country, because all of this affects the valuation of the various assets. You can set price levels for each asset in your portfolio at which you will sell it if it loses too much or gain enough that you are satisfied with the returns.