The term “investment portfolio” refers to all assets that have been invested. Creating a profitable investment portfolio requires discipline and strategy. Let us delve deep into the subject and learn more about an investment portfolio.
What is an Investment Portfolio?
An investment portfolio is a collection of assets that are expected to generate income, increase in value, pay dividends, pay interest, or earn rights. An investment portfolio is a compilation of various asset classes that entail passive asset ownership as opposed to direct investment, which entails active portfolio management.
For asset classification purposes, an investment portfolio is divided into two major categories. The first category is a strategic investment, which entails purchasing and holding assets for an extended period of time, usually more than a year. The assets will be held in order to generate income through dividends or rent or to increase in value over time, or all.
The strategic investment is one of the world’s most popular investment strategies, and it is used by famous billionaires like Warren Buffet. The tactical approach, on the other hand, entails the active buying and selling of assets in the hope of achieving short-term gains. The tactical approach is also referred to as the speculative approach.
A typical investment portfolio will contain both tactical and strategic investments. This is used to categorize assets based on their profit terms.
Characteristics of an Investment Portfolio
- It does not involve day-to-day asset management.
- An investment portfolio’s assets are intended to generate passive income.
- An investment portfolio’s asset classes are divided into two types: tactical investments and strategic investments.
- Short-term and long-term investments are both possible.
- An investment portfolio’s assets vary and involve a wide range of asset classes.
What are the components of an Investment Portfolio?
Stocks, bonds, fixed deposits, mutual funds, and ETFs are examples of asset classes in an investment portfolio. Each component is explained in detail below.
Stocks
Stocks are the ownership of a portion or share of a company. A portfolio of stocks from various companies in South Africa and around the world can be included in an investment portfolio. Stocks can be short-term (for speculative investors) or long-term investments (for a value investor).
Stocks are held in order for their value to increase while also earning dividends. Dividends can be capitalized to generate rapid growth for one’s shares. For a speculative investor, shares purchased can be sold at a profit at a later stage or after a short period of time.
Government Bonds
A government bond is a financial instrument used by governments to fund their spending by issuing debt securities. Government bonds issued by foreign governments and local governments are included in an investment portfolio.
A government bond has a maturity date, which means that the debt (principal amount) will be returned to the lender with interest on that date. Bonds have lower risks than stocks and, as a result, offer lower returns.
Fixed Deposit
A fixed deposit is a financial instrument offered by banks that pay interest in exchange for saving money for a set period of time. Because a fixed deposit is part of one’s passive income, it can be added to one’s investment portfolio.
Fixed deposit accounts guarantee the principal and interest amounts that your money will earn over time. This is one of the most secure investments available.
Mutual Funds
A mutual fund is a type of investment fund that pools money from many investors and invests it in stocks, bonds, and other assets. Mutual fund investments are included in an investment portfolio because they do not require the investor to be hands-on.
Exchange Traded Funds (ETFs)
An ETF is a type of investment fund that tracks the performance of a group of stocks, bonds, or commodities. Some ETFs are also traded on the stock exchange, such as NFEVAL – NewFunds Value Equity ETF, which is offered by Absa.
ETFs are passively managed and can be included in one’s investment portfolio. One can invest in as many ETFs as they want from various countries.
How to build an Investment Portfolio
It is now clear what constitutes an investment portfolio, but how does one begin to build an investment portfolio? Here are four steps to creating an investment portfolio from scratch.
1. Decide if you need help
The first step is to determine whether you require assistance in establishing an investment portfolio. Others are at ease managing their money, while others prefer to delegate responsibility. If you prefer to delegate, you can use the services of a financial planner or a financial advisor.
2. Determine your risk tolerance
Before beginning an investment portfolio, you must first determine your risk tolerance. Such an evaluation will assist you in identifying the investments that are beneficial to you. Your risk tolerance will determine whether you can invest in stocks or bonds or other options available.
3. Choosing the best asset allocation
You need to develop an investment strategy now that you know your risk tolerance and which investment fund or financial instrument you want to invest in.
An investment strategy must be detailed and include elements such as capital allocation to assets and a withdrawal period and/or percentage.
4. Choosing accounts to use to invest
If you want to diversify your investment portfolio, you will undoubtedly need to open a number of accounts. To begin investing, you must open an account with a financial institution such as Allan Grey, Alexander Forbes or PSG. Accounts can also be opened with banks, and trading platforms can be used.
You will be able to start an investment portfolio that works best for you after the final step. Remember that you are investing to earn passive income, so you do not need to spend as much time withdrawing and depositing funds as you would if you were a trader.
Conclusion
An investment portfolio is a great way to keep track of your overall investments as well as to generate passive income. A good investment portfolio is one with a diverse set of assets. Since most assets, both tangible and intangible, will be included in the portfolio, having an investment portfolio can be one of the easy ways to grow your wealth.
