After saving for a while and raising an amount of money, the smart thing you should do is put your money to work in a safe way and that gives you sustainable returns in the future. An investment portfolio is an ideal way to make a profit while ensuring you preserve capital or assets.
The set of financial assets owned by an investor is known as a portfolio or investment portfolio. It can include bonds, stocks, currencies, cash, commodities, derivatives, and many more assets.
Components of a portfolio
Investments that are included in a portfolio are called asset classes. The investor or financial advisor must ensure that there is a good mix of assets to balance, which helps foster the growth of capital with limited or controlled risk. A portfolio can contain the following:
- Actions
They are the most common component of an investment portfolio. A share is part of the value of a company, which means that the owner of the shares is a joint owner of the company. The size of the stake in the company depends on the number of these you own.
Stocks are a source of income because as a company makes a profit, it shares a portion of the profits through dividends to its shareholders. Also, as stocks are bought, they can also be sold at a higher price, depending on the performance of the company.
- Bonds
When an investor buys bonds, they are lending money to the issuer of those bonds, such as the government, a company, or a banking institution. A bond comes with an expiration date, which means that the money used to buy it must be returned with interest on the agreed date. Compared to stocks, these don’t pose as much risk, but they do offer lower returns.
- Alternative investments
Alternative investments can also be included in an investment portfolio. They can be assets whose value can grow and multiply, such as gold, oil, and real estate. Alternative investments are generally traded less frequently than traditional investments, such as stocks and bonds.
Portfolio types
There are different types of portfolios, according to your investment strategies.
- Growth portfolio
From the name itself, its goal is to promote earnings growth by taking greater risks, including investing in growing industries. Portfolios focused on these types of investments generally offer higher potential rewards and fairly high risk. The growth portfolio often involves investing in younger companies that have more potential compared to larger, well-established companies.
- Income portfolio
Generally speaking, it focuses more on ensuring regular income from investments rather than focusing on potential capital gains. For example, when stocks are purchased based on dividends rather than a history of stock price appreciation.
- Value portfolio
For value portfolios, an investor takes advantage of buying cheap assets by valuation. They are especially useful during tough economic times when many businesses and investments are struggling to survive and stay afloat. Investors look for companies with profit potential, but that are currently priced below what the analysis considers to be their fair market value.
Some advices
To create a good portfolio, you must determine the purpose of the portfolio. Answer the question of why to know what type of assets you have to invest in.
It also minimizes investment turnover, meaning some investors like to be continually buying and then selling stocks in a very short period of time. This only increases transaction costs and they fail to analyze that some investments simply take time before they finally pay off.
Do not spend too much on an asset, because the higher the acquisition price of an asset, the higher the breakeven point to meet. Therefore, the lower the price of the asset, the greater the possible profits.
Also, never trust a single investment. As the old adage goes: “Don’t put all your eggs in one basket,” as the key to a successful portfolio is to diversify your investments. When some are in decline, others may be on the rise. Having a wide range of investments will help you reduce your risk.
