What is an Investment Portfolio?
An investment portfolio is a set of financial assets owned by an investor and may include bonds, stocks, currencies, cash and cash equivalents, and commodities. Further, it refers to a group of investments that an investor uses in order to earn a profit or make the investments grow while making sure that the capital amount or assets are preserved.
Components of a Portfolio
The assets that are included in a portfolio are called asset classes. The investor or financial advisor needs to make sure that there is a good mix of assets in order that balance will be maintained, which may result in the growth of investments with limited or controlled risk. A portfolio may contain the following:
Stocks are the most common component of an investment portfolio. They refer to a portion or share of a company. It means that the owner of the stocks is a part owner of the company, and the size of the ownership depends on the number of stocks he owns.
Stocks are a source of funds because as a company makes profits, it shares a portion of the profits through dividends to its stockholders. Also, as it is bought, it can also be sold at a higher price, depending on the performance of the company.
When an investor buys bonds, he is loaning money to the bond issuer, which, in most cases, is the government, a company, or an agency. A bond comes with a maturity date, which means the date the principal amount used to buy the bond is supposed to be returned and the interest applies. Compared to stocks, bonds don’t pose as much risk as stocks do, but its rewards are not as high either compared to that of stocks.
3. Alternative Investments
Alternative investments can also be included in an investment portfolio. They can pertain to assets whose value can grow and multiply, such as gold, oil, and real estate.
Types of Portfolios
Portfolios come in various types, and the following are the types according to their strategies for investment.
1. Growth portfolio
From the name itself, a growth portfolio’s aim is to promote growth by taking greater risks, including investing in growing industries. It is considered riskier because it basically just looks at a company’s growing revenues and invests in it even if it doesn’t seem to be profitable at the moment. However, investing in growth portfolios is not something commonly done because they are suitable only if there is more than enough capital.
2. Income portfolio
Generally speaking, an income portfolio’s goal is to make money without ever losing even a portion of the capital. An example is buying stocks or bonds wherein for the former, profit is earned from dividends and for the latter, interest is gained.
3. Value portfolio
For value portfolios, an investor takes advantage of buying cheap assets by valuation. They are especially useful during difficult economic times when many businesses and investments struggle to survive and stay afloat. Investors, then, search for companies with profit potential but are sold at a lower price.
Steps in Building an Investment Portfolio
To come up with a good investment portfolio, an investor or financial manager should take note of the following steps.
1. Determine the objective of the portfolio
Investors should answer the question on what the portfolio is for to get a direction of where the investments are to be taken.
2. Minimize investment turnover
The thing with some investors is that they like to keep buying stocks and then selling them within a very short period of time. They need to remember that such type of investment does not earn very quickly and may take a few years before it finally pays off.
3. Minimize costs
Another mistake by investors is thinking that it is alright to spend small amounts as their value is negligible. They should remember that these small costs become big when put together. Plus, these few dollars could have possibly compounded had they not been spent.
4. Don’t spend too much on an asset
The higher the price for acquiring an asset, the higher the break-even point to meet. So, the lower the price of the asset, the higher the possible profits.
5. Never rely on a single investment
As the old adage goes, “Don’t put all your eggs in one basket.” The key to a successful portfolio is diversifying the investments so that if one of them fails, it doesn’t affect the rest of the investments.
CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful: