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Planning to open a portfolio? Follow these tips

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You can either hold and manage your portfolio yourself or appoint a financial professional for the task

The term called ‘portfolio‘, often used in the domain of finance, is a collection of investments like stocks, bonds, commodities, cash, and cash equivalents like closed-end funds and exchange traded funds (ETFs).

Although the common perception is that stocks, bonds and cash comprise the core of any portfolio, the entity can even contain other assets like real estate, art, and private investments.

You can either hold and manage your portfolio yourself or appoint a financial professional for the task. This article will help you to decode the game in an easy way.

Assess Your Priorities First

First, make a list of your financial goals. Arrange them on the list as per their priority basis. After that, sort the goals by time horizon to decide how long you will need to hold the investments.

“Short-term goals are those where you’ll need the money within 12 months. Medium-term goals take between one and five years to accomplish. Long-term goals take more than five years to reach,” explained a Forbes article, while talking about the ‘Time Horizon’ concept.

Also, investors should move toward a conservative asset allocation as the goal date approaches, to protect the portfolio’s earnings up to that point. In this case, the investor can opt for a portfolio with large-cap value stocks, broad-based market index funds, investment-grade bonds, and a position in liquid, high-grade cash equivalents.

Understand Your Risk Tolerance

After deciding upon your financial goals and the investment roadmap, the next thing you need to do is zeroing on your risk tolerance (how much the investor is willing to lose in the short term to achieve each goal).

Risk tolerance works in unison with the time horizon. If the investor takes on little risk when saving for retirement, he/she will fall short of the savings goal.

However, if the individual is five years from retirement, taking on too much risk will be harmful as well, as the person may end up losing money without a chance to make up the losses.

Get Educated About Portfolio Types

A hybrid portfolio diversifies across asset classes, including stocks, bonds, commodities, real estate, and even art. A hybrid portfolio entails relatively fixed proportions of stocks, bonds, and alternative, compatible and beneficial investments.

An investment portfolio is a strategic one, where one can buy financial assets with the aim of holding onto those assets for a long time. In an equities-based portfolio, the underlying assets may assume great risks in search of great returns. Investors aggressively seek out companies that are in the early stages of their growth and have a unique value proposition.

The equities-based portfolio also has a defensive counterpart, where it focuses on ventures making consumer staples that are impervious to downturns. Defensive stocks do well irrespective of market situations.

Then you have an income-focussed, equities portfolio, where money making source is dividend-paying stocks/other types of distributions to stakeholders. Income portfolios like Real Estate Investment Trusts (REITs) generate positive cash flow.

A speculative portfolio is best for investors possessing a high level of risk tolerance. The portfolio also includes initial public offerings (IPOs) or stocks that are rumoured to be takeover targets. Technology/healthcare firms developing breakthrough products also come under this portfolio category.

Match Account Types With Investment Goals

“Before you pick investments, you need a place to put them. That’s why you want to build an investment portfolio using an account that aligns with your investment goals,” stated Forbes Advisor.

Tax-advantaged accounts like Individual Retirement Account and 401(k)s work best for long-term, retirement-related goals and can accommodate any risk tolerance level.

Taxable online brokerage accounts work well for mid-to-long-term goals where the investor wants more upside potential than a lower-risk deposit account.

“Deposit accounts like CDs, money market accounts and high-yield savings accounts work best for short-term goals where you want a bit of growth but can’t afford to lose money,” Forbes Advisor remarked further.

Select Investments

Stocks alias equities are units of ownership located in a publicly-held company. The investor can buy shares of thousands of companies all around the world. Stocks are higher-risk investments but also offer a greater value growth chance than bonds/cash. Talking about bonds can turn investors into lenders.

In case you lack the financial freedom to buy bonds/stocks or want to spread out your risk between multiple stocks and bonds, you can invest using exchange-traded funds (ETFs) and mutual funds. These investments are baskets of securities. When you buy shares, you own a bit of everything in the securities’ basket. However, your risk will vary depending on the fund type.

You can also invest in precious metals real estate, cryptocurrencies, hedge funds and even commodities like wheat. However, these alternative investments often carry higher investor risk than stocks and bonds.

Investments like CDs (Certificate of Deposit), savings accounts and money market funds also offer low-risk ways to set aside cash but come with a modest return rate.

Create Asset Allocation & Diversify

After deciding upon the investment types for your portfolio, determine how much of each you need to buy.

“Making money is great, but how much did you not lose on the way down?” stated Brian Robinson, a certified financial planner (CFP) at SharePoint, while discussing the ‘choice’ factor.

Asset allocation will help you diversify your capital in a way where you can enjoy capital appreciation in exchange for limited losses.

After deciding upon your asset allocation pattern, diversify your investments within those asset classes. You can split up your 90% allocation stocks between large-and-mid-cap stocks and then diversify stocks across the sectors.

Monitor, Rebalance & Adjust

Your job doesn’t end with the buying of the investment portfolio; rather the real challenge starts from there in the form of care and attention.

Feel free to check on your portfolio twice a year to ensure your asset allocation is aligned with your goals. If the market goes into a volatile mode, be proactive and rebalance your holdings.

“You may also need to adjust your investment strategy as life changes. Getting married or divorced, becoming a parent, receiving an inheritance or nearing retirement is all life events that could necessitate rethinking your current investment strategy. The best investment portfolios grow and thrive like house plants—with regular care, attention and feeding along the way,” Forbes Advisor concluded.

Financial organisations offer capital management services too. These ventures possess a team of dedicated and experienced financial analysts and consultants. Portfolio management requires a thorough market understanding and these professionals are tailor-made for the role.

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