Different industries use different jargon in their daily, professional life. An investment portfolio consisting of various options is one of the most common concepts in investing and finance. An investment portfolio is a collection of assets—stocks and bonds, real estate, and even cryptocurrency—owned by one person or entity.
How do you build an investment portfolio? It seems intimidating and complicated, but it doesn’t have to be. Anyone can make their investment portfolio with the proper knowledge, tools, and research. However, remember that investing doesn’t guarantee sure profit and can bring losses too.
What is an Investment Portfolio?
An investment portfolio is a collection of assets like stocks and bonds, exchange-traded funds, real estate, and cryptocurrency. It’s more of a concept than a tangible object since most people do investment options digitally, but viewing your investments as parts of a whole is more convenient.
It’s essential to look at different investment accounts for retirement and brokerage collectively when deciding how to invest them.
What are the Benefits?
Diversification
As an investor, you must allocate capital to reap the benefits of having exposure to the financial markets. When you create a diverse investment portfolio, investors can also reap benefits. A portfolio with diverse investment options will help protect your capital if one financial market segment doesn’t perform well.
Potential
Not having an investment portfolio may catch you unprepared for milestones in life. Dropping money in a savings account may protect it, but the growth will most likely be modest compared to the potential profits you can get in the financial markets.
Getting an investment portfolio guards and positions your capital to potentially earn big profits to prepare you for life events like funding for college education or housing.
Income
Building an investment portfolio centered on income securities can supplement your income for the near term and future.
For instance, allotting a percentage of assets to dividend-paying stocks will provide a stable stream of income to those distributions. Investing in bonds is another way to have more income, as they make regular interest payments over the life of the investment.
Liquidity
When you direct your capital into the financial markets versus other investment options, like real estate, you’re more likely to access your money on time when needed. You can easily trade real estate, equities, or fixed-income instruments depending on supply and demand.
When this happens, you can exchange the investment for cash quickly. You cannot easily convert tangible assets, like land, to money. That requires a long-term commitment.
How Do You Build an Investment Portfolio?
Decide how much help you want.
Building an investment portfolio from nothing seems tedious, but you can still buy and manage your money without all the hassle. Robo-advisors (also known as automated investing services) are readily available to build and manage your investment portfolio. They consider your risk tolerance and overall goals when making an investment portfolio.
Meanwhile, financial planning services or advisors are also available for investment management and mapping a comprehensive financial plan.
Choose an account that works towards your goals
You need to open an investment account to build an investment portfolio. The good thing is that there are many investment options available. The right type of investment account will cater to your savings goals, style of investing, and account ownership wishes, so thoroughly consider what you’re investing for before you pick a type of account.
For instance, an individual retirement account (IRA) offers tax advantages for the money you invest. A high-yield savings account might be more appropriate if you want to invest within the next five years. You can use regular taxable brokerage accounts if you want to invest in a house.
Choose your investments based on risk tolerance.
Once you have opened an investment account, fill your investment portfolio with the assets you have or want to invest in. Here are some instances:
- Investing in stocks means you get a tiny slice of ownership in a company. Investors purchase stocks that they think will have a higher value as time passes. The risk here is that these might not go up at all or even lose their value.
- Bonds are loans you apply to at companies or governments that get paid back as time passes and with interest. Experts consider them to be safer than stocks but generally have lower returns.
- A general advantage of mutual funds is that they permit you to invest in an assortment of stocks, bonds, or all at once. Mutual funds are generally less risky than individual stocks but still entail some risk.
Determine the best allocation for you.
The way you divide your portfolio among your different types of assets is called asset allocation, which is highly dependent on your risk tolerance. Try looking at model portfolios to show how you can allocate your assets. However, consider your risk tolerance since not all model portfolios work right for you.
A Matter of Risks and Rewards
Attaining your long-term financial goals entails balancing the risks against the rewards. While numerous investment options are available, there’s no “one-size-fits-all” approach to investing. That’s why choosing the right combination of investments for your portfolio is critical and rebalancing them as needed.
