Published on October 31st, 2023 | by Christopher Porteus0
A Beginner’s Guide To Building an Investment Portfolio
Image by Austin Distel on Unsplash
A recent study of over 23,000 respondents found that less than one-third of beginner investors are personally confident in making decisions. This number contrasts with 52 percent of intermediate investors and 82 percent of experts.
Since investment decisions require money, time, and commitment, confidence is essential to enrich productivity and acquire good financial returns. As a beginner investor, you don’t have to be discouraged to take the first step to growing your wealth.
Keeping track of your investments involves building an investment portfolio. Why is it essential, and how can you create yours?
Defining an Investment Portfolio
Your investment portfolio is your collection of assets. This collection includes assets you buy and cash deposits for income generation or increasing capital appreciation.
These assets can be real estate, cash deposits on a money market account or certificate of deposit, or anything you can buy with a brokerage account—bonds, crypto, exchange-traded funds, stocks, and mutual funds.
The following are the different types of investment portfolios:
- Portfolio Investment: Ideal for strategic and tactical investments. Strategic is where you acquire assets with the intent of owning them for a long time, while tactical is active buying and selling to obtain short-term gains
- Hybrid Portfolio: An investment portfolio that combines commodities, real estate, stocks, and bonds in relatively fixed proportions
- Aggressive, Equities-Focused: Portfolio for aggressive investors that assume more significant risks and seek companies that are starting to grow with a unique value proposition
- Defensive, Equities-Focused: Focuses on investing in consumer staples that will do well in good and bad times
- Income-Focused: Concentrates on picking investments that will provide earnings through dividends
- Speculative, Equities-Focused: Best for investors with a high tolerance for risks
Why build an investment portfolio?
Establishing an investment portfolio is more than just consolidating your assets. Besides this, here are the other reasons to create yours:
Accumulate and grow your wealth
With an investment portfolio, you can structure your wealth accumulation. This structure can help you increase the value of your portfolio and see what investments are providing the utmost growth.
Moreover, an investment portfolio is a disciplined approach that encourages monitoring and regular rebalancing to prevent impulsive financial decisions. This way, you can accumulate and grow wealth without risking significant losses due to unwise choices.
Diversify investments and income
Your single investment might be doing well, but it won’t necessarily last forever. Significant losses in one asset can lead to bankruptcy. That is how diversification can help you mitigate this risk.
Diversification involves combining various investments to reduce the risk of a single investment. When one asset performs poorly, you have others that can offset the potential losses.
An investment portfolio serves as a tracker—you won’t get confused about which asset is which. Your portfolio can also help you stay focused on your different goals.
Protection from inflation
The value of money tends to diminish over time due to inflation. You can protect your investments by including resilient assets with capital appreciation during inflation.
Concurrently, with asset portfolio and diversification, you can invest in commodities that increase in value, ensuring that your investments remain intact, which could grow over time.
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Steps for Building an Investment Portfolio
Building your investment portfolio isn’t as complex as you think. These tips can help you establish one that aligns with your needs and investment goals.
1. Identify your financial goals
The first step involves identifying and making a list of your financial goals. Determine your goals by evaluating your financial capability and resources. Once your goals are set, specify how long you’ll hold them until you require the money.
Indicate whether they are short-, medium-, or long-term.
- Short-term goals are when you require the money within 12 months
- Medium-term goals for investments that take one to five years to achieve
- Long-term goals for investments beyond five years
For example, if you want to buy a second house or rental property through mortgage loans this year and then save funds for retirement, you have short-term and long-term goals.
2. Assess your risk tolerance
After setting your goals, assess your risk tolerance. Can you afford significant losses within short periods, or are you ready to take more risks for a long-term goal?
If you invest in a short-term goal, it’s best not to take too many risks and be mindful so you won’t lose what you’ve saved. Meanwhile, you can take more significant risks when you invest in long-term goals because you have time to recoup the potential losses.
Ultimately, your risk tolerance should balance your requirements and comfort with market fluctuations.
3. Pick an account suitable for your goals
Once you know your risk tolerance, pick a suitable account for your goals. Here are the following accounts you might want to consider:
- Deposit accounts like a certificate of deposit, money market account, or savings account are ideal for short-term goals
- Tax-advantaged accounts like a 401(k) and individual retirement account (IRA) for long-term and retirement goals
- Brokerage accounts for medium- and long-term goals
4. Choose the types of investments you want to build
Now, it’s time to choose your desired assets. Here are the types of investments to consider:
- Stocks are the units you’ll own in a corporation
- Bonds allow you to lend money. The borrower will pay interest until they repay the total amount
- Funds can be exchange-traded or mutual. Exchange-traded funds are shares you can buy and sell during market hours, while mutual funds are shares you can buy or sell based on the price set after the market closes
- Alternative investments include commodities, real estate, hedge funds, and cryptocurrencies, which are typically high-risk
5. Allocate and diversify your assets
The next step involves allocating and diversifying your assets. You should decide how much of each investment you can buy. Rather than throwing your money into every asset with potential returns, it’s best to allocate it accordingly.
Asset allocation helps you avoid investing in a single asset. With this, you can enjoy more income and capital appreciation while minimizing potential losses. Consequently, you diversify your assets across multiple sectors, broadening your assets and potential income.
6. Monitor to maintain, rebalance, or adjust
Building an investment portfolio doesn’t stop at buying assets. You must monitor it to maintain, rebalance, or adjust some aspects.
Checking your portfolio twice a year ensures your assets consistently align with your goals. This way, you can see what needs rebalancing when the market becomes unstable.
Furthermore, regular monitoring lets you adjust your investment strategies based on life changes. For example, getting married and having kids may require adjusting your approaches.
Create a Winning Investment Portfolio
A winning investment portfolio depends on your goals, risk tolerance, and investment approach. Besides commercial purposes, you can use it to save funds for education, retirement, and other personal needs. Your investment portfolio will help you plan and secure your future.