Have you been planning to start investing your money and starting getting awesome rewards? Starting up an investment plan requires you to have a strong investment portfolio which will serve as a guideline for you.
Yes, no doubt, creating a strong investment portfolio can be very challenging for you especially if you are just starting up.
However, the success of every investment plan depends on having a solid portfolio.
In this article, we will be revealing to you simple and easy steps on how to build a strong portfolio.
Grab a chilled glass of water and relax as I take you through the journey.
What is an investment portfolio?
An investment portfolio is a group of assets such as bonds, mutual funds, stocks, and exchange-traded funds, or any form of investment acquired by an investor with the primary aim to grow in value.
Types of an Investment portfolio
Depending on the strategies to be used, they are 3 major different types of an investment portfolio.
As the name implies, a Growth portfolio is focused on investing in growing and young industries. A growth portfolio involves higher returns but usually comes with higher risk too.
Investing in a growing industry, the process and journey through the market might be very risky, so you must prepare yourself to accept the risk involved in the market. A growth portfolio is usually recommended for investors who have the time to patiently wait for the high return and also navigate through the risk.
A portfolio is an income portfolio that generates regular dividends, income, and rewards. An income portfolio is dedicated to the dividend rather than price appreciation. However, the Growth portfolio is more focused on price appreciation. An example of an income portfolio is purchasing stocks based on the current dividend rather than the possibility of to increase in price.
A value portfolio involves investing in assets that are undervalued or underestimated in the market than their book value. A value investor takes advantage of the market to buy the asset cheaply and holds it.
Now, let’s look at how to successfully build a strong investment portfolio.
You have been thinking that building an investment portfolio is challenging. Then you are probably far from the truth. Anyone can build a very strong investment portfolio whether you are just starting or not. You need is just the right knowledge, tools, and research.
Here’s how you can successfully build a strong portfolio in 4 easy steps.
how to build a strong investment portfolio
Step 1: Open an account
Yes, you will agree with me that you need an investment account to get started.
Therefore creating investment is the first thing to do, however, As an Investor, you are expected to open an account based on your own needs, what type of account meets your needs ?. Is it a regular brokerage account that allows you to invest in stocks, bonds, and ETFs or an account that allows you to meet your retirement plans and other needs?
More so, while creating an investment account, be aware that some associated fees are inevitable. So kindly find out the rate of the associated fee before opening. Some of the associated fees can be service charges for buying, selling, and maintaining your investment as well as maintenance fees for maintaining the account.
Step 2: Asset Allocation
After you have successfully opened an account, the next step is Asset Allocation.
Asset allocation is the strategy of your sharing your money on different assets, the process of putting your money in any asset you want in the market.
Asset allocation is influenced by the Age of the investor, a young youth will be more aggressive in investing than the aged.
Before allocating your asset, important things need to be taken into consideration which are Future goals, investment horizon, and risk tolerance.
- Future goals: Your goals should be reflected in your portfolio, and your portfolio should be created in a way that resonates with your goals. Your goal can be short-term, or long-term goals. Short-term goals are set to be achieved within 3 years while long term can take a very long time like 10 years upward. Regardless of your goal, whether It is a short or long term always make provision for it in your portfolio.
- Investment horizon: Your investment horizon or time horizon is the duration between when you are investing and the time you have your return. Some investment return is achieved within a few months or a year while some can take a very long period.
- Risk tolerance: this is how well you can handle and deal with risk. It is the ability of an investor to deal with risk or not, as an investor if you want to get a high return with low risk and you don’t want to lose any portion of your money, then you have a low-risk tolerance.
Now, here is a formula that can help you in allocating your asset
Subtract your age from 110 and use the answer to know how much you put into stocks For instance, let’s an investor is 35 years old i.e 110-35 = 75. This means you should probably consider putting 75% of your assets into stocks, while the remaining 25% of your investment portfolio will be dedicated to other things such as bonds.
Step 3: Choose your asset
Now, you are almost done on your journey of building a strong investment portfolio, choosing which asset to invest your money in is the next thing. The advisor recommends you spread your money across various assets because diversification is important in your business.
Let’s take a look at some of the assets including your Investment portfolio.
Stock: when you are one investing stock, you are buying a fractional part of the ownership of the company. It means buying shares of cooperations and companies.
Bonds: Bonds are financial assets in which the investor borrows the company or government money. It simply means giving out loans to companies on certain terms and conditions. The company refunds the money at the stipulated time with interest.
Mutual funds: Mutual funds are investment arrangements that pool money from many investors and the money is managed by a fund manager who uses the money to buy securities like stocks and bonds.
Exchange-traded funds; ETFs are an investment method that involves pooling money. ETFs, combine features of mutual funds and stocks. You can also buy and sell ETFs in the stock exchange the same way you can buy and sell normal stocks.
Step 4: Rebalancing your investment portfolio
Now. You have completed your investment portfolio, amazing right?
Yes, it is
However, a change can happen to your investment portfolio over time. It must for you rebalance the change and bring it back to its original state.
Equilibrium must be maintained, for every shift or change that occurs, you must rebalance it.
Let’s say for an instant, you invested 75% in your portfolio and you observed it has changed to 90 %, you will have to rebalance it by bringing it down to 75 % probably by selling part of it.
It’s recommended to always do an analysis and check on your Investment portfolio every 6-12 months.
Risks involved in building an investment portfolio
Life, itself is a risk, there is no Investment without risk, everyone is just taking a calculated risk and getting the reward, however, the most trusted assets can hit rock bottom.
They are three risks involved in building a portfolio; sovereign risk, loss of principal, and inflation risk.
Sovereign risk is the risk of a government not fulfilling their debt obligation, they are unable to pay up their bond or implement foreign rules that can harm the Market.
Loss of principal
Loss of principal is the risk of losing part or all of the original investment that is the principal made by the investor.
This is the risk that profit or return from the investment will be smaller than what should expect. This is caused as a result of inflation in the market and it is usually fixed-income assets like bonds.
When creating your Investment Portfolio ensure your asset allocation adheres to your future goals, time horizon, and risk tolerance, you will be able to handle and deal with the ups and downs.
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