What is a Portfolio?
A group of lions is called a ‘Pride’, and a group of bees is called a ‘colony’. Similarly a group of your financial investments is called a ‘portfolio’. These investments or assets could be bonds, stocks, cash, commodities and many more.
An ideal portfolio contains diversified asset classes, which could range from government bonds to small cap stocks or bluechip stocks to even forex. As important as it is to create a portfolio, managing a portfolio is also equally important for high returns or else you could be beaten by inflation.
What Is Portfolio Management?
This part discusses all about the selection of the right set of assets in order to maximize your investment returns and profits.
Thing to remember here is that it is not a one- time action so you must be readily active in managing your asset portfolio. This needs constant monitoring of your assets in the portfolio. This ensures that each asset in the portfolio delivers the best return in the given time frame.
You must remove stocks that are not performing well and have stopped growing and replace them with the ones that have a future in the market and can give potentially high returns.
Factors To Consider When Creating A Portfolio
Weather you create your portfolio for the first time or rebalance your portfolio there are a few factors that might help you in making better decisions while allocating your portfolio
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Diversification
When you approach the stock market, it is a great decision to spread your investments across various market categories, so even if one or two sectors are not performing well in the market, they can be balanced by other assets and your whole portfolio doesn’t suffer.
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Minimize Investment Costs
The worst part while investing is that a major chunk of expense for investors is occupied by commission fees and management expenses. This is even worse and especially true if you buy and sell stocks on a regular basis, as they eat away your profits in their own brokerages and many other charges.
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Regular Investments
If you want a strong portfolio then it is important that you are active in the market and are making regular investments. If you are able to do this then not only you are making high profits and taking high returns on investments also the habit of investment discipline stays with you for a long time. When your risk appetite increases you can increase the amount to invest in the market.
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Follow Up Buying
It is a good idea to not invest all your money in a stock at once as there are many uncertainties in the market. So to be on the safe side, initially invest just a portion in the stock, if the performance of stock meets your expectation then you can increase your investment for a better position in the stock.
What Are The Different Types Of Portfolios?
There can be as many different types of portfolios and strategies as the investors and money managers want. You can choose different parts of a portfolio if you want a portfolio which reflects your investing strategy, current need and many other factors. But few types of portfolio that you can find in the market are:
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Aggressive Portfolio
As the name suggests, this type of portfolio contains stocks with high risks but the advantage is that they can provide you with high returns. These stocks usually have high fluctuations and volumes which makes it risky.
This type of portfolio requires a high risk manager, and success depends on minimizing the losses and taking profits.
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Defensive Portfolio
This portfolio consists of stocks with low fluctuations, which does not react too much to the market so they are typically isolated from broad market movements. The only strategy here is to bring down the risk of losing the principle
Typically, a large portion of a defensive portfolio has funds allocated to fixed income securities like dividend paying stocks and bonds investors with low risk can go for building a defensive portfolio.
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Income Portfolio
Another widely popular type of portfolio that primarily focuses on investments making money as dividend incomes or interest incomes along with other types of distributions. Generating a positive cash flow, an income portfolio invests in companies that return a chunk of their profits to their shareholders. It is not entirely focused on capital appreciation rather capital gains with active income.
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Speculation Portfolio
This type of portfolio carries the highest risk of all among the types of portfolios we discussed. These portfolios are typically invested in the Initial Public Offering(IPOs) or on the stocks that could be takeover rumor targets.
Technology and healthcare firms in the process of developing a single breakthrough product would also fall in this category. As there is no certainty of this investment being successful, investors must adopt due diligence as speculation portfolio carries pretty high risks.
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Hybrid Portfolios
Hybrid portfolios offer a great deal of flexibility, a hybrid portfolio approach diversifies among and across the asset classes. To build a hybrid portfolio you must take a position in stocks as well as bonds, commodities, real estates, and even art pieces.
This entails a fixed proportion of stocks, bonds and other assets, this is beneficial as historically, stocks, bonds, and other assets does not have perfect correlation with each other and so they provides us with a stability in our portfolio.
End Note
The goal of portfolio management and portfolio reallocation is to maximize the returns on our investments in the portfolio.by monitoring and managing the portfolio you can achieve your goal short or long term faster and in an easy way.
For this you have to start as early as possible so that you can enjoy compounding on your investments, and this gives you enough time to deal with short term inconsistencies.
