To live in today’s world, a person must take essential steps to combat the effects of disturbances in the financial environment. Therefore, people must think beyond their paychecks and adopt suitable strategies to maximize their wealth to create a cushion for any sudden and high volume economic shock.
If there’s anything that people new to the investment market often feel puzzled by, it is the occurrence of this word – “investment portfolio.” It’s often the heavy vocabulary that repels people away from exploring the world of daily market investments. Don’t fret. This article has all the answers that you need.
What is an investment portfolio?
Like an artist’s portfolio, a collection of all artistic pursuits undertaken by an artist, an investor’s portfolio is a collection of information on all the securities asset classes an investor has put their money into. Asset class refers to stocks, mutual funds, exchange-traded funds, bond funds, real estate, annuities, or any other financial asset that a person can possess to retrieve a higher value or stock results on their investment later.
An intelligent investor often has a diverse portfolio that diversifies risks while meeting financial checkpoints. In layperson terms, a smart investor would strategically invest in different asset classes to minimize the risk of losses. Consider this example: there’s investor ‘A’ who only invested in stocks, and investor ‘B’ invested in real estate, mutual funds, and the same stocks as investor ‘A.’ The financial year was rough for the company’s stocks that investors ‘A’ and investor ‘B’ put their money into. It’s evident that both investors lost their investments, but investor ‘B’ played comparatively safer and made up for the loss through gains in other asset classes. Concisely, investor ‘B’ had better investment ideas.
To build a strong portfolio, you must be clear about your intentions. You need to know how much you expect to get back at the end of your investment period or the ‘investment horizon.’ While investing in asset classes that offer higher returns on investment can sound like an easy way to get more in less time, more often than not, it’s not the case. Different asset classes have various risks. The higher the risk, the more its value is prone to fluctuations and unpredictability. Usually, the asset classes with higher returns are hazardous. Keep a close eye on the 52 week high of different stocks to understand market trends. Take enough time to figure out what your financial goals are. You can start by asking some important questions to yourself. They could go in this order:
- What is my investment horizon? In other words, how sooner or later do I want my investments to mature?: You can set up investment strategies specific to short or long-term goals.
- How much can I afford to risk? Or how much is my risk tolerance?: Risk is often overlooked when gains come into the picture, but they’re an essential part of intelligent investment planning. You should be honest about how much you can be okay with losing if the odds are against your favor. It’s a bitter truth that all investment schemes carry some risk. The best way to combat the ideation of the worst-case scenario is by preparing for the worst.
- What asset class aligns with my goals and risk tolerance?: This is the last question that would only lead you to an answer if you’ve answered the questions above. No matter what asset class you choose, ensure that you’re not limiting yourself to just one type of asset class. As stated earlier, diversification is necessary to minimize losses. Taking the advice of a financial advisor can be a smart strategy that you can utilize if you’re unable to come up with an investment plan on your own.