The grouping together of financial assets like cash equivalents, bonds, stocks and their counterparts whether they are closed fund or exchange related is known as a portfolio. These portfolios are managed by financial professionals but are held by investors.
Understanding Portfolio
A portfolio should be assembled after keeping the investing objectives and risk tolerance in mind. Let’s take an example to understand it better. Think of the portfolio as a pie that is divided in different slices that represent different types of investments so a risk-return portfolio allocation can be determined.
Portfolios are favored according to a person’s temperament. If an investor is conservative, they would prefer a portfolio that has broad market index funds, large cap value stocks, investment bonds, and high liquid cash equivalents. On the other hand, someone who loves taking risks might prefer a high-yield bond exposure, a large cap growth stock position, and other alternative means to add to their portfolio.
How to Create an Investment Portfolio
Here are some ways in which you can create an investment portfolio:
- See your future goals. You must know when you will need the money and how much of it.
- If you have long term goal in mind, you should know that time determines how the returns on volatile investments will be. People who have a long term goal in mind generally prefer volatile assets that include commodities and small cap stocks.
- If you have short term goals in mind don’t invest in volatile investments because they will work against you.
- Be on a lookout for inflation because if you have a fixed income, it can affect your buying power and regular payments.
With investment comes risk, so if you want to minimize the repercussions, go for FIDC inspired products like a certificate of deposit. Invest in different asset types in order to control the volatility of a portfolio. You can also go for commodities because they counteract inflation, as their prices go up with inflation. Lastly, know the things that are a part of your investment portfolio even if the values are not updated.
Further Reading
- A survey on multiobjective evolutionary algorithms for the solution of the portfolio optimization problem and other finance and economics applications – ieeexplore.ieee.org [PDF]
- International portfolio choice and corporation finance: A synthesis – onlinelibrary.wiley.com [PDF]
- Are Islamic finance innovations enough for investors to escape from a financial downturn? Further evidence from portfolio simulations – www.tandfonline.com [PDF]
- Portfolio analysis, market equilibrium and corporation finance – www.jstor.org [PDF]
- Households' portfolio choices. – elibrary.ru [PDF]
- Robust portfolios: contributions from operations research and finance – link.springer.com [PDF]
- Why do individual investors hold under-diversified portfolios? – ideas.repec.org [PDF]
- Portfolio selection with transaction costs – pubsonline.informs.org [PDF]
