A financial portfolio is a term used to refer to the collection of investments of an investor. Investment portfolios typically include stock and bond holdings, mutual funds and exchange-traded funds.
These portfolios can also have other speculative or financial market tools an individual can use to increase his or her financial wealth.
Investment portfolios can be passively or actively managed. In order to customize a portfolio that is unique to the investor, he or she needs to be sure of a few things:
- What they want in their portfolio
- What they are comfortable with financially
- Their timeframe
Important Questions to Get Started
To get started on investing, it is important to frame what your personal goals are and the bigger picture in your life.
What are Your Life Goals?
Whether you are saving for retirement or building a college fund for your children, understanding what you want your investments to do for you allows you to make good decision surrounding the when, where and how you can invest.
Creating a Timeframe
The length on of time an investor has will determine the types of strategies he or she will use for maintaining their portfolio. For instance, a young college graduate will have more time to accrue a substantial level of return on investment than a worker who is in their forties or fifties. Find out how to save for retirement later in life here.
Determine How Much You Can Invest
Understanding how much resources you have and the amount of assets you have available to you is key in deciding whether you can invest comfortably and safely. They also play a vital role in what types of investments are the most viable for you.
Level of Comfort with Risk
The higher the risk involved in an investment, the higher its potential for return is a general rule of thumb. Lower-risk investments are more reliable but provide much smaller returns. Potential investors must examine how much risk is associated with a certain investment opportunity but also how much risk is will be within the entire portfolio.
The answers to these questions can provide investors with a grounded idea of where they can place their focus on and what they are getting into in terms of portfolio management. One detail to note is that investors age, and as they age, their lifestyles and needs will also shift with them. Because investors are always changing, revisiting these questions can prove useful for adjusting on their portfolio and strategies.
Making an Investment Portfolio
One you are clear on what you need and your priorities are in order, you are ready to begin investing. Your responses to the questions above can be used to choose a variety of investments that align with your goals, your comfort level with risk and the timeframe you have. The process of selecting where to invest is referred to as asset allocation. Assets are the resources that an individual will invest, and this can be spread across different types of investments. This is called diversifying and in order to do this effectively, you can do this in a multitude of ways.
Selecting a Variety of Investment Opportunities
Investors divide their money between investment tools rather than placing all their resources in one investment tool. Placing money in different investment tools increases the chances of getting benefits and minimizing the negative results of each. Spreading investments across industries and geographic market sectors can reduce the overall impact to a portfolio, especially when surprising events radically change a certain industry or area.
Invest at Different Levels of Risk
Investing in both high-risk and low-risk opportunities can curb the negative effects of one or many of these investments. Investing in this manner can increase the chances for the investor to reach his or her desired rate of return. This ensures that an investors do not lose all of their money in a market downturn.
Do Your Research
You should scrupulously examine your opportunities before putting money into them. Here are some questions you can ask to ensure their good opportunities:
- Do they have a good track record?
- Are they currently operating legally and efficiently?
- What are their plans?
- Are they fiscally responsible and is their work stable?
Essential Portfolio Considerations
Most investors will do what is known as risk aversion when they begin to design and manage their portfolios. This behavior can fail to provide the desired return, even if they are more protected from more volatile investments. Diversified investments that are balance with high and low-risk opportunities are more effective. Although not considered as such, retirement savings should be considered by investors as part of their portfolios and financial planning. Consequently, maximizing the matching-funds options and tax advantages that are brought by IRAs, 401(k) plans and/or 403(b) plans can significantly improve the entire financial portfolio and long-term financial security of an investor.
One of the most important and most habitually overlooked parts of managing an investment portfolio is the timing of it. Investors who start early will have a must larger advantage than those who have started in their advanced age. Even the smallest investments made early can prove to make impressive returns in the future. This is especially true for investors who prefer a type of low-risk investment, but this will still have lower yields.
An example would be an investor that begins a small, minimal-risk investment in his or her early twenties re-invests the annual dividends back into the same investment. Over the course of the next several decades, the young investor works and adds to his or her portfolio in a variety of ways, utilizing other investment tools that slowly accumulate profit. By the time the investor is ready for retirement and cash it out, he or she will have a nest egg of income because of compound interest and patience. All done with little effort and low risk. If that investor was 40 when they began his or her investment, then it would not yield as high a profit.