If you are keen on the world of investment, you have probably come across the term diversity. A portfolio is a set of different types of financial instruments that allow a trader to invest and gain from diverse assets.
What is a Portfolio of Investments?
In other words, a portfolio is a compilation of stocks, commodities, bonds, properties and other types of assets that a trader acquires with an aim of investing and profiting from them. You might also look at a portfolio as a combination of different investment vehicles that allow a trader to attain his financial goals.
Why do you need a portfolio?
Most intermediate and advanced traders have a portfolio that they continue to grow throughout. The reason why a portfolio is important is that diversity alleviates your risk exposure. Think about it: if all your assets were in the form of real estate, what would happen if the real estate sector took a hard knock from a poorly performing market? Your financial status and investments would probably be in trouble.
Diversification entails investing in more than just one asset type to minimize the risk involved in investing in just one type of asset. When it comes to investing, you certainly do not want to risk everything on one endeavor, so to speak.
The different types of portfolios
Different investors will require different portfolios. It is worth mentioning that the nature of your portfolio is a reflection of your investment strategy. One type of portfolio is the conservative portfolio whose focus is to reduce risk exposure as much as possible. This type of portfolio typically features assets with a high liquidity such as cash or high quality assets with a fixed income. Conservative portfolios have the goal of protecting the value of the assets against the effects of inflation. It is common for this type of portfolio strategy to yield high profits in the long term while remaining risk averse.
Aggressive portfolios are remarkably different from conservative ones. Investors with this type of portfolio are tolerant to high risks with the anticipation that their assets will provide a high yield. This type of portfolio offers long-term returns. The moderate type of portfolio is suitable for investors who are abstemiously tolerant to risk. This type of investment strategy offers returns in the long-term and is ideal for investors who are looking to balance off the risks and the potential returns.
Tips for building a feasible portfolio
Balancing your investment portfolio can be incredibly effective at increasing your returns. However, there is more to building a portfolio than simply picking stocks, equities or other types of assets. Here are a few things to look out to for to build a solid portfolio:
Do you want long term or short-term returns - As seen above, different investment assets have different return periods. Bonds and cash, for example, have short return periods allowing you to get your dividends back in as short as six months. On the other hand, stocks yield substantial returns on the long term.
Asset volatility- High-risk assets typically have a potential for higher returns. Volatile assets are high risk but on the long term, these assets can yield impressive returns. Therefore, if you are looking to invest in volatile assets, your best bet is to look at assets with a long-term return period. On the other hand, if you are looking for short-term results, highly volatile assets may not be a good choice because the value of the assets may decline before liquefying.
The effect of inflation- Inflation is especially impactful on fixed income assets. A great way to alleviate the effects of inflation is to diversify your portfolio in a way that includes stocks, commodities, and treasury inflation protected security in addition to fixed income assets such as bonds or real estate.