Investment Portfolio
An investment portfolio is a basket of various assets that could bring income in the future. An investment portfolio can belong to a person, a government, or a business. The term “investment portfolio” is most often used by investors when it comes to purchasing bonds and stocks.
Therefore, next we will talk about this term precisely in the context of a portfolio consisting of securities. An investment portfolio can include any asset: gold, property (i.e., real estate); anything that can bring income.
The investment portfolio must maintain a balance between risk and return.
The structure of the investment portfolio depends on the goals pursued by the investor. For example, if rapid growth is required, then aggressive investment strategies can be used by placing risky assets in a portfolio.
If an investor adheres to a conservative strategy and wants to receive regular income from capital, it is worth using a conservative strategy.
Types of Investment Portfolios According to the Degree of Risk to the Investor
- Conservative portfolio. In this case, the goal is to save capital and reduce risks. The income received should be slightly above the inflation rate. With a large amount of capital, an investor can also be satisfied with a stable minimum income.
It includes:
- Bonds with a high degree of reliability: securities of large corporations, government bonds. Bonds typically offer limited capital growth, as they are repaid at face value. However, investors also receive regular coupon payments as income.
- Blue chips are a tool with a higher degree of volatility. There may be drawdowns, but their risk is small, and often «blue chips» give an increase clearly greater than bonds.
- Precious metals. They can be kept in an investment portfolio, but you need to remember that their profitability is low, and often below inflation.
A conservative portfolio will not bring very high returns, but there are almost no risks in it. It is used by those investors who need maximum stability.
- Moderate investment portfolio. Moderation lies in the fact that the investor uses low- and medium-risk instruments. The former provides a stable income, while the latter brings higher profits. And in total, the average level of the risk-profit ratio is obtained.
When forming such a portfolio, the following tools are used:
- Government and corporate bonds. The investor is recommended to hold 7-8 such assets.
- ETFs. The easiest and most affordable way to make a profit from owning expensive shares, since the investor will pay a commission to the broker for only one share, and the fund will be able to work with a large number of profitable assets.
- Mutual funds. A mutual fund share gives the investor partial ownership of a diversified portfolio. Due to the fact that income is generated by working with various assets, the risk of losing money is low.
A moderate investment portfolio provides a profit of 12-25% per year. At the same time, the share of high-risk instruments should not exceed 25%.
- An aggressive investment portfolio is suitable for those investors who want to maximize profits using a short investment period, while bearing increased risks.
What assets are included in this investment portfolio:
- Options and futures.
- High-yield bonds.
- Small companies with the prospect of a large increase in capitalization.
Such a strategy allows you to significantly increase your capital; however, it also carries great risks.
- Diversified investment portfolio.
Many investors do not have a clear investment strategy; they combine all three of the above strategies, distributing them as a percentage, while allocating the smallest share to aggressive investments (up to 20%).
- Speculative investment portfolio.
It is often considered a distinct category, since the investor carries out short transactions and earns on assets in a very short period of time: hours, minutes, and seconds.
Conclusions on the Investment Portfolio
An investment portfolio is a collection of different assets: stocks, bonds, real estate, etc. It is formed in such a way as to reduce the risk of losing money.
Investment portfolios are formed using three approaches. The portfolio should include:
- Different types of assets.
- Those assets that you can quickly sell.
- Assets with low risk, even if the investor is willing to take risks.
The investment portfolio may include different types of assets, taking into account the risk that the investor is willing to bear.
In order to form a portfolio correctly, you need to identify investment goals, choose a strategy that you will adhere to, and purchase securities. But this is also not enough, since the portfolio structure needs to be constantly reviewed and analyzed.