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As you wade through the world of investments, it might seem like an unfamiliar territory at
first. If you’re someone who is new to the world of investments and you wish to alleviate risks and seek higher returns, then you should start by diversifying your investment portfolio. An investment portfolio is a collection of an individual's investments in multiple products. The performance of these products needs to be tracked and analyzed to ensure that the investor gets maximum benefits.
Types of Portfolios -
Aggressive Portfolio: As the name suggests, an aggressive portfolio has an equal high risk - high reward proposition and all stocks in this portfolio have a high level of sensitivity to the market. They face higher fluctuation in terms of risk or reward when the market is booming or when it’s low.
Defensive Portfolio: The other extreme is a defensive portfolio, which, unlike its counterpart, aggressive portfolio, does not carry a high sensitivity to the market. These kinds of stocks are largely unaffected and isolated from rigorous market fluctuations. This portfolio mainly emphasizes on attaining returns with minimum risks.
Income Portfolio: Those who prefer opting for the income portfolio mainly choose it because this portfolio type promises to provide a steady, reliable dividend income from companies with a reduced level of risk or bankruptcy. These portfolio types are safe, defensive stocks that provide higher returns, which in turn generate a positive cash flow.
Speculative Portfolio: Speculative portfolio is synonymous to sheer luck and gamble. They possess higher risks than other portfolio types mentioned here. The investors who contemplate on investing in such stocks should have a greater tolerance level to risks, and should be prepared to face the consequences of losing the amount invested if the stock prices take a dip.
Hybrid Portfolio: A hybrid portfolio consists of an amalgamation of several other investment avenues such as bonds, commodities, real estate etc. This kind of a portfolio helps shield investors against any risks during transactions, and in a way, guarantee investors that their savings will come back to them after a certain period of time.
How to Choose Your Portfolio
Conducting a proper portfolio analysis is imperative before picking the right portfolio type for you. Before you plunge into investing into a portfolio, make sure you consider these various factors for analysis.
Determine The Ideal Asset Allocation: Having a clear picture of your financial situation as well as set investment goals are the first stepping stones towards building your own portfolio. Things you need to consider in order to pick the right portfolio are - time you have in order to build your investment, the capital and the funds you have available to invest in future capital needs. Another important aspect to contemplate about is the risk factor. Are you willing to risk your money in the expectation of a greater return?
Dividing Capital Into Appropriate Asset Classes: Once you’ve shortlisted the asset allocation bit, you need to quickly jump onto dividing your capital among the correct asset classes. If you look at it from a basic point of view, it doesn’t seem to be a tedious task. But, when it’s time to divide the various asset classes into sub-sections, that’s when you’ll realize that these subclasses within themselves hold a diverse risk and return potential.While making an asset allocation strategy, it is best if you analyze the quality and potential of each investment you buy.
Reassess Portfolio Weightage: Your work doesn’t end once you’ve an established portfolio. That’s when your work begins. Once you have a set portfolio, you need to, as a ritual, analyze and reshuffle your portfolio accordingly. Market keeps fluctuating on a daily basis and may cause your initial weightings to change. Factors like future needs, risk tolerance level, financial standing may change over the course of time, and due to that it is better to keep assessing and reframing your portfolio.
Time to Rebalance In a Strategic Manner: When you seek to sell your assets and rebalance your portfolio, it’s important to consider the tax implications and adjust your portfolio as per that. While we are talking about rebalancing and reshuffling, it’s vital to consider the position of your securities. If you feel at any point in time that some over-weighted stock isn’t bringing you any return, then it’s better to let go of that stock irrespective of the tax implications.
Portfolio Diversification: As their nature strongly suggests, stocks, bonds or mutual funds are supposed to provide investors with some kind of diversification, which then give them the flexibility of switching from an allocated portfolio to a different one. A diversified portfolio brings in lower risk than a portfolio biased towards aparticular stock, an asset, etc.
Check out other articles relating to portfolio diversification and wealth management.
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