In almost every article about the investment, you will come across a term called portfolio or investment portfolio. The time has come to talk more about this concept and examine it thoroughly.
Investment portfolio – what is it?
What is it – an investment portfolio? If you invest in several financial instruments, then you create an investment portfolio. In other words, this is a combination of investments that have been invested in various directions in order to reduce the risk of losses to a minimum.
In order to figure out why to create an investment portfolio, I will give an example: suppose you invest all available funds in the purchase of shares of a certain company. But if suddenly in the industry to which this company belongs, a crisis occurs or the company itself experiences force majeure, then you risk losing all your money without a trace. To prevent this from happening, an investment portfolio is created – in this example, it will be the purchase of shares of several companies from different sectors of the economy (if we talk about the stock exchange).
How to create an investment portfolio?
Before you think about how to create an investment portfolio, you need to formulate its purpose. You can, of course, invest money just out of interest or to get more money. But money itself is empty and meaningless, they are needed only in order to get something on them. An investment portfolio is just one of the tools that allows you to achieve your goals reasonably.
For any person, the accumulation of pension capital can be a worthy goal. This is necessary in order to retire (or stop active), you can feel comfortable and lead a familiar lifestyle, without limiting yourself to anything. In addition, the formation of a certain amount for the acquisition of real estate can be attributed to global goals. As a rule, the investment process begins with the fact that a person has to limit himself in something, putting aside part of his earnings. Therefore, it is very important to have a worthy goal so that it inspires.
There are many highly profitable and at the same time risky projects, investing in them all your money you can get a good profit. But with the same success, you can lose everything. Even if you decide to invest only in PAMM accounts, you need to divide the capital into parts. You can work with several traders using different approaches to investing. You can open deals on different currency pairs or invest part of the money in bank metals.
Some projects can cause losses, compensate for losses, and overall profit will still be made. If you plan to invest long and successfully, then the use of several financial instruments is inevitable. An investment portfolio is an opportunity to secure your investments. But you must understand that even if you copy the investment portfolio of another more experienced investor in any negative scenario, the responsibility lies with you. Therefore, before thinking about how to form an investment portfolio, it is worth considering whether you are ready not only for income but also for possible risks.
Profitability and risk in the investment portfolio
Profitability and risk indicators are key in assessing the investment portfolio. This issue is one of the most important when creating an investment portfolio. It is better not to invest more than 5% of the portfolio in aggressive instruments.
The principles of forming an investment portfolio
When forming an investment portfolio in the stock market, one should adhere to the basic principles that are aimed at increasing profitability and minimizing risks.
1. Relevance to investment objectives
The investment portfolio should be consistent with your goals and investment strategies. If you decide that the main purpose of the investment is to preserve accumulated savings and minimal risk (conservative strategy), your portfolio should consist of instruments with minimal risk – government bonds.
Asset allocation within a conservative investment portfolio: 50% – bonds; 35% – ETF; 15% – stocks.
The higher your risk tolerance when investing, the greater should be the proportion of shares in the investment portfolio.
2. Balance of assets
The investment portfolio should be balanced, and therefore should not depend on one or two economic factors – oil prices, the dollar or euro and others. Shares of companies should be distributed across sectors of the economy. So you can minimize the risks in case of sharp changes in the macroeconomic situation.
For example, if your portfolio consists solely of shares in oil companies, your income directly depends on uncontrolled and poorly predicted factors – oil prices, sanctions from the various countries, as well as foreign exchange rates.
Do not put yourself in a dependent position. Invest in companies from different sectors of the economy: finance, information technology, metallurgy, coal industry, energy.
Liquidity is an important factor determining the acceptable ratio of risk and profitability of exchange-traded instruments.
Liquidity is the ability of stocks and bonds to be sold quickly at a price close to the market. The most liquid instruments generally differ depending on the exchange. The liquidity of some companies’ shares is close to 100%. This means that any day you can buy and sell any number of shares of these companies at market prices with a minimum spread.
The difference between the maximum bid for the purchase and the minimum bid for the sale of shares is called the exchange spread. The higher the spread between applications for the purchase and sale of shares, the lower their liquidity.
4. Risk diversification
As we have already found out, investment portfolio instruments must have an acceptable level of risk, be consistent with financial goals and the chosen investment strategy and high liquidity. In addition, the investment portfolio should not entirely depend on the influence of one or more economic factors – for example, oil prices or the dollar. The combination of all these principles allows us to talk about a diversified approach to risk management and the formation of an investment portfolio.
Diversification is the distribution of investments in various exchange instruments that are not related to each other.