How to make an investment portfolio
Basic knowledge for investment portfolio
Before putting together an investment portfolio, answer the following questions:
- What is your primary purpose for investing? Serious investing is not a case where the answer may be that you just need the money. Make a clear and understandable goal. For example, to have a constant passive income of N rubles per month by 2025, or to receive a stable dividend. The goal may be to raise capital for the education of a child. Your goal will determine your basic strategic decisions, choice of portfolio type, etc;
- How long are you willing to invest for? Assemble an investment portfolio for a term of three years or, better yet, five years;
- What level of risk do you tolerate? There are now freely available assets with any level of risk, from the most conservative to ultra high-risk. Find a comfortable balance for yourself;
- What is the best and worst outcome you expect from your investment portfolio? It’s made up of dividends received and the growth of individual assets;
- How much time can you devote to managing your investment portfolio? You may miss out on the important stock market and world events while being distracted by your primary profession outside of finance.
Risks at the beginning of investing:
- Issuer risk – company failed to meet expectations;
- sector risk – decline in demand for the products of all companies in a particular sector of the economy;
- economic and political risk – a decrease of profit of the company due to foreign or internal politics of the state.
An investment portfolio can also protect money from inflation, build up investment capital for a larger project, give financial freedom with life solely on dividends or income from their planned sale.
An investment portfolio is constructed with an eye on the family budget, which should not suffer too much from your contributions.
However, when you examine your personal or family budget (if you haven’t done so before), you may conclude that you don’t need an investment portfolio right now.
Benefits of building an investment portfolio
Why create a portfolio of securities from different companies?
- Risk diversification. You will feel less of a blow from a drop in the stock price, negative news related to a particular industry, crises in a particular sphere;
- Possibility of constant adjustment of risk/return ratio. At any time you can change the composition of your portfolio and smooth out this ratio. It all depends on your goals;
- Assets are balanced in different sectors of the economy. For example, your investment portfolio will have the “blue chips” of the mining industry, IT sphere, fashion, transportation, etc. Maximum diversification is created from covering more companies in different areas;
- Passive profits from the ETF fund. ETF fund investment portfolios include 20, 30, or more companies, which provides a good level of diversification and a convenient risk/profit ratio.
When you don’t need to build an investment portfolio
You don’t need an investment portfolio if one of the following is present:
- Income is less than expenses. When analyzing your budget, do you realize that expenses exceed income? Resolve this issue and get your finances in order. Only then can you start working on investments;
- You have outstanding loans. On the road to financial freedom, your priority goal should be to get rid of all debt. You need to pay off all debts first, and then buy assets;
- You don’t have a safety cushion. This will threaten your current standard of living, so there should be no thoughts of investing yet. In addition to a steady source of income, you need a safety cushion for half a year of your life. A detailed article on how to form an airbag
- There is no goal of investing for the long term. First, understand what you want to achieve from the investment in three or five years.
Is there no shortage of funds in your family budget? Is the airbag already set aside and investment goals mapped out? Move on to creating an investment portfolio. There are many positives to such a decision.
The path to financial freedom is through an investment portfolio that matches your goals and risk appetite. Market analysis and long-term planning will get you closer to your intended outcome.
Investing begins with a choice. You decide you want to profit from securities. You want to take things seriously and that involves creating a sound investment portfolio.