Investment portfolio: what it is, how it happens and how to make it

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Investing all your money in only one instrument of capital multiplication has always been considered a very risky business. It is much more stable and efficient to distribute funds in different directions so that possible losses in one area are compensated by an increased level of income in another. The practical implementation of this idea is an investment portfolio. In fact, it represents the totality of financial and real investments. If we talk about the stock market, then in the narrow sense of the word, this term means absolutely all securities, regardless of type, duration and liquidity, owned by a legal entity or an individual, acting as an integral object of management.

What is an investment portfolio

Each investor has his own priority between risks, profitability and liquidity of investments. Depending on the ratio of these factors, it is possible to single out a portfolio of growth,income and mixed, reasonably combining both of these areas. Each of them has its own goals and features. Thus, the investment portfolio of growth is aimed at maximizing income in the long term. In this case, the investor refuses from highly profitable areas that generate income in a short period of time. The basis of such a portfolio, as a rule, is made up of securities that show stable growth, and its goal is to increase capital by increasing the market value of such assets. In this case, dividends play a secondary role. An income investment portfolio, on the contrary, aims to maximize profit from each transaction and is designed for maximum profitability in the short term. In this case, the long-term prospect of securities is not of decisive importance, and the decisive criterion for choosing securities is high current income, including through dividend and interest payments. The risk of the investment portfolio in this case is much higher than the previous option. These two types are extremes, appropriate only in special cases and under certain circumstances. It is best, of course, to form a balanced portfolio, or, as it is also called, an investment portfolio of growth and income. Its goal is the optimal combination of profitability and risks.

Choice of investment instruments

Regardless of the type of portfolio, we recommend using diversification everywhere. A huge number of factors influence different papers, and it is impossible to keep track of all of them. Therefore, the concept of an investment portfolio implies a reasonableallocation of funds between different types of financial instruments. After choosing an asset class, it makes sense to allocate funds among the different types of securities belonging to this class. For example, if the government decides to focus on the energy industry, instead of buying the shares of a clear leader with all the capital, it is better to buy shares in several companies operating in this area. Another diversification option is to choose securities with different dividend payout periods. This will allow you to reinvest in assets whose value has gone up significantly.

Periodic revision

At least once a year, you need to do a comprehensive analysis and evaluate the current distribution of assets and, if necessary, adjust the ratio of assets. At first, it is important to learn how to achieve goals on time in the long term, and as you gain experience, when you feel confident in your forecasts, you can adjust the portfolio more often.

Reinvestment

Regularly investing part of the profits in assets can greatly increase capital. At the same time, instead of a large contribution at the end of the annual period, it is better to invest 1/12 of this amount monthly. Although it is perfectly acceptable to make large investments if they are available at the moment, and the current situation requires quick action.