BUILDING AN INVESTMENT PORTFOLIO (PART 1)

As has been previously established, investments are very important in everyone’s journey to financial freedom. Hence, it is necessary to learn how to build an investment portfolio that preserves and grow your wealth. This article aims to enlighten you on how to build a sustainable investment portfolio to grow your wealth.

An investment portfolio is a basket of financial assets owned by an investor. In simpler terms, an investment portfolio consists of all the investments you have stakes in. The combination of the bonds, mutual funds, stocks, gold, cryptocurrencies, commodities, currencies, etc. owned by an investor is regarded to as the investor’s investment portfolio.

It is important that we understand the types of investment portfolios buildable. Investment portfolios are can be grouped according to the investor’s expected outcome and the investor’s risk tolerance.

In building investment portfolios based on the investor’s expected outcome, the three types of investment portfolios are:

Growth Portfolio: This portfolio is designed with the aim of delivering growth on your investment by taking greater risks. The general rule of thumb in investing is that greater risks tend to yield greater returns. If you invest in a government bond for instance, the return will be relatively low because the risk attached to such an investment is relatively low compared to if you invest in company stocks. Hence, growth portfolios typically offer a very high potential reward with an associated high potential risk.

Value Portfolio: This portfolio is specifically designed for the investor who wants to take advantage of buying cheap financial assets now with the expectation that they will appreciate over time. This portfolio type is especially useful during difficult economic times when many businesses and investments struggle to survive. The investor invests in opportunities with potentials but current cheap prices in order to sell for a higher price when they appreciate in future.

Income Portfolio: This portfolio focuses on securing regular income from investments as opposed to focusing on potential capital gains. An example is buying stocks based on the stock’s current dividends rather than for the share price appreciation.

In building investment portfolios based on the investor’s risk tolerance, the three types of investment portfolios are:

Aggressive Portfolio: This portfolio is designed for investors with a high-risk investment personality, that is, they are willing and able to invest in high-risk instruments. The rewards of this portfolio are potentially very high however, the investor should be willing to wait a long time to earn them.

Moderate Portfolio: This portfolio is designed for investors willing to take risks in a conservative, calculated manner. While the moderate portfolio requires a significant amount of time to earn returns, it requires less time than the aggressive portfolio.

Conservative Portfolio: This portfolio is designed for investors that want a significant degree of certainty with little or no risk involved.

Now that we have determined the types of investment portfolios based on the individual desires and risk appetite of the investor, our next article will further educate us on how to build an investment portfolio that will help us achieve our financial and investment goals.

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Thank you for reading and look out for our next article!

REFERENCES

A Guide to Building A Profitable Investment Portfolio. (2020, December 23). Africa Prudential. https://africaprudential.com/a-guide-to-building-a-profitable-investment-portfolio/

Corporate Finance Institute. (2019, March 27). Investment Portfolio. https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/investment-portfolio/