This article will discuss investment portfolios and the different options you have.
I have already spoken about the best asset allocation for getting rich and for expat investing.
This article will speak in more detail about investment portfolio options.
If you want to invest and are confused by all the options out there, you can contact me using this form, or use the chat function below.
Investment:
Definition – Investment is the process, where the existing money of an individual is put into something in order to receive more profits from it. There are different types of investments that can be profitable for the individual. Since, investing is a process that involves making more significant money, there is an amount of risk involved in it. So, while making an investment, a person should be cautious about the procedure, benefits, risks involved, etc., so that they might be able to have profitable returns from it.
Some major types of investments are:
- Financial Investments (such as Stocks, Bonds, Exchange Traded Funds, Mutual Funds, Options, Futures, Cryptocurrencies, etc.),
- Cash investments (such as lending money, making a deposit in a bank, certificate of deposit, etc.)
- Real Estate Investments (such as flipping a property, renting it out, buying a property and holding onto it and selling after the price of the property increases, etc.)
The most common type of investment that comes into people’s minds whenever somebody mentions investment is a Financial Investment, i.e., in stocks, bonds, funds, etc.
The financial investments (although involve a considerate amount of risk), if done correctly with a perfect strategy, can be very beneficial to the individuals. There are many cases, where people who started by investing thousands (if not hundreds) of dollars and were able to earn millions of dollars.
Listening to this situation, anyone might think “it seems profitable, why don’t I start investing in the stock market and earn millions of dollars?”. Well, that might not be possible for everybody, especially for people with a beginner level knowledge of investments and the stock market.
As there are cases where people were able to earn millions of dollars, there also exist cases where people lost millions of dollars. When not done in the correct way, people tend to lose a lot of money by making an investment in the stock market. Financial investments are always subjected to the market risks and people who make hasty decisions or have a little amount of knowledge on the topic might lose money, most probably.
In terms of Financial Investments, if an asset is bought for a certain price and sold for a price that is more than the actual price, they receive a certain amount of profit known by the name of ‘Capital Gains’. Generally, most of the profits received by the people are referred to as returns. There is another form of return from the investment, which is known as a ‘Dividend’. If a company earns profits then they pay their shareholders with a certain amount of money, and that is known as a Dividend.
Investment Portfolio:
Definition – An ‘Investment Portfolio’ is nothing but a collection of overall assets belonging to an investor such as ‘Stocks’, ‘Bonds’, ‘Options’, ‘ETFs’, ‘Mutual Funds’, etc. It is not to be confused with a ‘Portfolio Investment’, which is used to refer to a single specific asset under a portfolio. The above-discussed examples such as Stocks, Bonds, securities, etc., can be called Portfolio Investments. Investors often try to design their portfolio in such a way that risk tolerance is low based on their long/short-term financial goals.
Asset Allocation – It is a process of allocating the portfolio investments in such a way that they balance the risk and help in attaining the financial goals. Asset allocation is a very important process that needs to be done very carefully so that the person will not be prone to risk, as some assets have higher risks involved when compared to others.
Allocating assets in a way such that the risk is balanced is very important. If the risk involved is high, there is more probability for a person to lose their invested money. When the risk is too low, the person might find it hard to achieve their financial goals (as lower risks mean significantly lower profits). That’s why a well-balanced investment portfolio is very essential for an individual to reap maximum benefits on their investments.
Having discussed that, now let us have a look at each profitable investment asset and how an investment portfolio should be designed in order to gain more profits. The general categories of portfolio investments, with which a person can be able to design their portfolios are as follows:
Stocks:
Stocks are the most commonly used in order to build a successful investment portfolio. Stocks are nothing but a collection of shares in a company (it can either be a single company or multiple companies). Shares are generally used to represent the proportion of ownership of a company, while the cluster of shares that have been grouped together are referred to as Stocks.
The person who owns a stock is called a ‘Stockholder’. Stockholders are entitled to a proportion of the company’s earnings. If that company undergoes liquidation of assets, the stockholder is paid with the fair share of their ownership (after the company pays off any existing debts, if any).
Stocks play a major part while creating a successful portfolio and known to provide better results in the long run. This means, stocks are highly beneficial for the people who buy and hold onto them for a long period of time and then sell them after they have had an increase in the price. Just like we have discussed earlier in this article, the ability to have greater profits comes with greater risks involved.
Investments in stocks can be made with the help of stock exchanges. The transactions of stocks at the stock exchanges are usually regulated by the governments in order to prevent fraudulent activities and provide protection for the investors. By doing so, the government tries to contribute to a wealthier economy.
The stocks which are bought are generally stored in an electronic format with the help of a Demat account. Companies also have the power to buy back the shares from an individual, by offering them the originally paid amount along with the capital gains (if there are any increases in the actual stock price). Most of the stock options offered to the employees generally as compensation and not actual ownership. There are two types of stocks to make an investment in, they are:
- Domestic Stocks – These are the types of stocks of companies that are actually present within the country of the investor.
- International Stocks – These are also known by the name of Global Stocks. These are the type of stocks of companies that are actually present outside the country of an investor.
Stock Derivatives – Before knowing what a stock derivative is, let us take a closer look at what a derivative is. A derivative is a type of financial instrument/security that relies on or is derived from another underlying group of assets (which is known as a Benchmark). Derivatives can exist for various types of assets such as Stocks, Bonds, Commodities, Currencies, etc.
The primary kinds of derivatives for stocks are ‘Futures’ and ‘Options’. These can rely upon/be derived from a stock index or a company stock.
Futures – The Futures contracts allow investors to speculate the future price or hedge the risk of an asset on a present date. Futures are known to be derivatives contracts as the value for them is usually determined by the price of the underlying asset. Futures are known to be transparent and liquid assets as the trades can only be made with the help of a regulated stock exchange.
Options – Based on the type of contract owned by the individual, Options allow investors an opportunity to buy or sell the assets underlying. The difference between Options and Futures is that, in options, the investor is not required to buy or sell their stocks if they choose not to, unlike the Futures (where the investor is obliged to buy or sell). There are two main types of Options namely, ‘Call Options’ and ‘Put Options’.
‘Call Options’ give access to the investor to buy an asset at a specific mentioned price occurring within a certain timeframe. ‘Put Options’ on the other hand allow the holder to sell an asset at a determined price within a chosen timeframe. The Call Options and Put Options create a base to a wider range of options strategies that are specifically designed for Speculation, Income, or Hedging an asset.
Though Options might be considered as one of the most profitable financial instruments, investors should carefully manage or invest in Options by cautiously taking note of all the risks involved.
ETFs:
ETF (Exchange-Traded Fund) is the type of investment fund, which is a basket of financial assets such as stocks, commodities, futures, etc. ETFs are also traded on a stock exchange just like the stocks. The main difference between mutual funds and ETFs is that ETFs can be traded through the day during the trading hours. ETFs operate on a mechanism such that the trading is kept close to the overall value of the assets (however, deviations might occur occasionally).
As we have mentioned earlier, the most important factor that determines a successful investment portfolio is asset allocation. Investing in the ETFs would make the investment portfolio diverse because with the help of the ETFs you can only be able to invest in larger and successful companies or small companies with a higher success rate (which makes the ETFs perform well regardless of certain economic conditions).
Mutual Funds:
It is a financial instrument/investment basket that pools the funds from many investors and invests the money gathered in assets such as stocks, bonds, etc., The money in the mutual funds is usually managed by fund managers or portfolio managers who are experienced professionals in investing. It is a very good option available for the investors as they wouldn’t have to actively manage their investments on their own.
As mutual funds are directly based on the performance of the market, if the good market performance leads to successful returns and negative impact on the markets would lead to negative results. Diversification can be easily achieved with the help of investing in mutual funds. Considering different factors, the classification of mutual funds is given below.
Based on the asset class, there are 3 major types of mutual funds namely, ‘Debt Funds’, ‘Equity Funds’, and ‘Hybrid Funds’. Debt Funds invest in assets such as bonds (government or corporate). Equity Funds are used to make an investment in stocks. Hybrid Funds, like the name suggests, are used to make an investment in a mix of both Debt Funds as well as Equity Funds.
Based on the structure of a mutual fund, there are two types i.e., ‘Open-ended Mutual Funds’ and ‘Close-ended Mutual Funds’. Investments can be made in Open-ended Mutual Funds any time the investor wishes to (on business days), whereas, investments can be made in Close-ended Mutual Funds only during the launching of an asset and can only be withdrawn after the time of maturity is completed. Open-ended Mutual Funds are more convenient to an individual when compared to Close-ended Mutual Funds.
Based on the investment objectives of a person, the mutual funds are again classified into 4 major types. They are ‘Growth Funds’, ‘Income Funds’, ‘Liquid Funds’, and ‘Tax Saving Funds’.
Growth Funds involve a higher amount of risk as the main objective is to earn more profits. However, they can be profitable for the buy-and-hold type of investors. Income Funds target on stable profits (mostly containing Debt Funds). Liquid Funds help an individual to keep aside their money for a short period like an emergency fund. Liquid Funds mostly consist of Certificates of Deposits (CDs), term deposits, treasury bills, etc. Tax Saving Funds are the type of funds that primarily focus on tax benefits.
Some other honorable mentions:
There are some other alternative types of investments that can play a major part in an investment portfolio. A few notable examples for such types of investments are ‘Precious Metals’, ‘Currencies’, ‘Real Estate’, ‘Oil’, ‘Cryptocurrencies’ etc.
Precious Metals – Investments made in precious metals can be highly advantageous over the long term. Investments made in the precious metals such as gold and selling the assets owned after they have acquired a higher price can be highly beneficial than the user can actually expect.
Forex Trading – Investments made currencies is also known as Forex Trading. It is the process where an individual makes an investment in a certain currency and sells it in the form of another currency. Forex Trading generally happens in pairs, where a currency is sold in the form of another currency.
Real Estate – Investments made in the Real Estate are very beneficial to an investor and even beat the risk of inflation. There are many types of investments that can be made in Real Estate such as ‘Real Estate Investment Trusts (REITs)’, ‘Flipping (buying a property and selling after making some repairs or renovations’, etc.
Types of Investment Portfolios:
Depending on the strategies and objectives of investment, there are three major types of investment portfolios. They are ‘Growth Portfolio’, ‘Income Portfolio’, and ‘Value Portfolio’.
Growth Portfolio – The main objective of a growth portfolio is to generate more profits by involving a high amount of risk. The general example of a Growth Portfolio is investing in companies that are still growing. Even though having a subsequent amount of risk involved, this type of portfolio can provide excellent returns to the investors.
Income Portfolios – Like Income Funds, Income portfolios are the type of portfolios that primarily focus on a stable and secure regular income. In this type of portfolio, the assets are generally allocated based on their ability to provide dividends rather than capital gains.
Value Portfolio – These are the types of portfolios that help investors to take advantage of investing in low priced assets by valuation. This can be highly beneficial as during the times of economic crisis many companies find it hard to stay on the top and the assets can be bought at a very low price. For example, in the present situation of COVID – 19, many companies stocks’ prices became extremely lower prices than they actually are. Buying them at such prices and selling them after they gain value can lead to higher profits.
Important steps to build a successful portfolio:
A diverse portfolio is always a successful portfolio. An investment portfolio with good diversification can lead to beneficial long term results. There are, however, a few steps that should be followed while building a successful portfolio. Let us take a look at those important steps.
- First of all, the investor should have a determined objective about what their objectives are. They should determine whether they want a portfolio that promises them higher profits, or they want a portfolio with a steady and regular income, or they want a portfolio for long-term goals. Knowing the objective might help them in building the type of portfolio which would be helpful to achieve their financial goals.
- We have mentioned many times since the beginning of this article that the portfolio’s success mainly depends on the asset allocation. The perfect allocation of assets would lead to higher returns. This can be done based on factors such as the age of the investor, financial goals, how much time they are willing to spend in order to make their investments grow, amount being invested, future needs, etc.
The strategy differs based on each type of factor. For example, if we take age as a factor, if a young person chooses to make an investment, he or she would need a long-term investment strategy. whereas, an elderly person might need a different type of investment plan.
Another type of factor is risk tolerance. People who tend to target more profits within a short amount of time should be ready to face the probable risks involved in it. Where there lies a greater amount of profit, there lies exactly the same amount of risk as well.
Depending on these types of factors, a person can clearly organize an investment strategy.
- Another major step while building a portfolio is determining what type of investing is the person interested in. There are two major types of investors, ‘Aggressive Investors’ and ‘Conservative Investors’.
Aggressive Investors are the type of investors that can deal with risks involved and always tend to reap maximum benefits from their investments. Aggressive investing might not be a favorable option for most people, but people can become billionaires by investing properly with this concept. Aggressive investors’ portfolios are designed in such a way that most portion is invested in stocks and other riskier assets, and a comparatively less amount in bonds and fixed income securities.
Conservative Investors are the people whose motto is “Slow and Steady Wins the race”. Although not being the concept guaranteed to achieve huge returns, Conservative investing can be a good option to earn profits with less risk of losing money. This type of investors invest more in fixed income securities and bonds rather than investing in stocks.
Young people who have higher risk tolerance might benefit from aggressive investing and people who are nearing their retirement age and looking for a good profitable portfolio without losing their money can rely on conservative investing.
- Distribution of capital among the assets in a portfolio is the next step. After having successfully allocated the assets, now an individual is required to plan how much capital they are willing to invest in each asset.
Based on assets there are sub-classes to each type of asset as well. The person should not only carefully choose the asset while dividing the capital, but they also should get familiar with the sub-classes and which type of sub-class would be more profitable.
For example, while investing in stocks, the person has to divide the capital between industrial sectors, companies, domestic stocks, international stocks, etc. Similarly, when it comes to bonds, options include long-term bonds, short-term bonds, government debts, corporate debts, etc.
While distributing the capital among stocks, individuals should determine their level of risk tolerance, investment goals, etc. certain factors should be taken into consideration such as sectors, market capitalization, types of stocks, etc. like we have discussed earlier. The analysis should be perfect on what type of stocks to choose and after investing in the stocks, investors should stay updated on the price changes and company/industry news.
Bonds should be selected in such a way that they should meet with the financial requirements of an individual. Some factors include the type of bond, coupon, maturity period, credit rating, and interest rates.
Mutual Funds can be hassle-free as they are managed by fund managers and no regular interaction is involved. However, the fund managers charge a fee, which is deducted from the returns earned. Index Funds can be an alternative to this as they involve lower fees.
ETFs are cost-efficient when compared to mutual funds. They also offer access to a wide range of asset classes to choose from, giving the opportunity of rounding up the portfolio for an investor.
- The last step that needs to be done is regularly monitoring and rebalancing the established portfolio. Periodically, every portfolio would have the requirement for rebalancing the assets. This is done in order to balance the weightage of assets in such a way that the objective is maintained properly.
For example, for conservative investors, if the risk involved in their assets increases, they would have to sell some of the riskier stocks and buy some stable assets such as bonds. In the case of aggressive investors, If the investor is willing to take more risk to earn higher returns, then they would have to lose some stable assets and invest more in the equities.
Bottom Line:
That being said, building a successful investment portfolio is very important for investors to gain more profits. However, the processes such as picking the assets, rebalancing the portfolio, etc., might be huge time-consuming processes. They can even be rather confusing for beginner-level investors. Even though it is possible for an individual to do all these things on their own, it would require great knowledge about investments and their valuable time.
In order to avoid the loss of your precious time (in which you can be able to make more money by doing your own work), or if you are new to investing and need professional financial services, you can contact us and get the job done for you. It is recommended to take the help of a financial expert (like us) while making investments because any small mistake can cost you a lot of money.
Hoping that this article came in handy for you. We wish that you have a bright and successful investment career with huge profits from all your assets.
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