Financial investment is typically connected with two prime aspects – risk and return. When the risk is the possibility of incurring losses, return is a profit or income you earn by investing. Both risk and return are interconnected in that the greater the risk, the bigger will be the return on investment or vice versa.
Financial investment asks for balancing risk and return through building an investment portfolio. If you have just begun your investment journey, you may find it intimidating to construct a portfolio. One finds it challenging to keep aside enough funds after meeting the expenses concerning utilities, rent, credit card payments, and EMIs monthly.
What is an investment portfolio?
An investment portfolio includes a group of financial assets like bonds, equities, and cash, as well as cash equivalents, currencies, and commodities owned and used by an investor to earn a profit. Holding various types of assets promotes diversification and reduces overall risk. With an efficient asset allocation, you can maximize returns from investments.
Reliable stockbrokers or financial advisors can help you with portfolio management services. For instance, DBS helps you determine the asset classes’ relative attractiveness through the Asset Allocation Framework so that you could have them in your investment portfolio. Their relative attractiveness is assessed by considering factors like Fundamentals, Momentum, and Valuations.
Get to know various components of a portfolio
Assets in an investment portfolio are generally called asset classes. To maintain a balance, an investor, a stockbroker, or a financial advisor should ensure that the portfolio has the right mix of assets to foster capital growth with controlled risk. A portfolio contains:
A typical investment portfolio includes equities or stocks as a common component. They are issued by companies allowing the shareholders to become part-owners. Owning equities helps you earn a share of profits called dividends. Moreover, you can trade in stocks and make profits by selling them for a higher price.
They refer to investment securities, and through them, an investor lends money to the issuer of the bonds, who are governments and companies. The issuer repays the money on the maturity date with interest. There is not much risk attached to bonds, and hence, the returns are lower than that earned from shares.
- Alternative investments
A portfolio also includes alternative investments, which are financial assets supplemental to conventional stocks, bonds, and cash categories. Some examples of alternative investments are gold, real estate, oil, hedge funds, and private capital.
Various types of portfolios
You can have a customized portfolio considering factors like your investment horizon, risk appetite, or views on a specific asset, trend, or sector. As far as a portfolio is concerned, it is built based on the strategy for investment. For instance, DBS offers portfolios with an asset mix measuring the investor’s risk appetite.
- Conservative Portfolio: With it, you can preserve capital involving low-risk exposure.
- Balanced Portfolio: It uses a balanced risk-and-return approach to promote modest capital growth.
- Moderate Portfolio: With it, you will have low-risk exposure and some capital growth.
- Aggressive Portfolio: It allows you to maximize capital growth with greater exposure to risky assets.
Steps to follow when constructing an investment portfolio
A financial manager or advisor can help you build a good portfolio by:
- Defining a portfolio’s objective
For it, an investor should determine the aim of a portfolio to get an idea of the types of asset classes to include in the portfolio.
- Reduce investment turnover
Continuous buying and selling of stocks in short periods may result in high transaction costs. It is advisable to wait as some investments take time to pay off.
- Avoid paying high prices on assets
You need to meet a higher breakeven point with a higher price for an asset. Sourcing assets at lower prices will increase your chances of making high profits.
- Invest in diverse assets
Build a portfolio with various asset classes. It will help you to minimize your loss. Diversifying investments will reduce your risk. If one asset is not performing well, the others may be doing well. Thus, your overall risk is reduced.
With a good investment portfolio, you can ensure regular income and financial stability.