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What is Investment Portfolio - Portfolio Formation

The term “investment portfolio” seems to be a little complex, but there are a few key steps to take to build an investment portfolio that matches your lifestyle best, either you want to be laid back or highly engaged with your financial assets.

What is Investment Portfolio

What is Investment Portfolio

An investment portfolio is a set of investments in some financial objects (in accordance with an investment strategy), which will provide maximum profitability in case of minimum risk.In short, a portfolio investment can be any possession that is purchased to provide maximum profitability in case of minimum risk. Determining a well-balanced portfolio that meets your personal investment goals and risk tolerance is a key success factor for any investor. When it comes to investment policies portfolio investments can be classified as strategic and tactical. Strategic investment has an intention of buying financial assets for long term growth or/and income yield. A tactical investment is a process of actively buying and selling assets for short-term gains.

The main purpose of an investment portfolio is to get an optimal result in the scope of the realization of a developed investment policy through the selection of the most reliable and profitable investments. A portfolio is comprised of various types of investment assets.

Types of Investment Portfolios

By the method of generating profit and by the level of risk, investment portfolios are divided into the following types: conservative, moderate and aggressive.

Conservative portfolio

Conservative portfolio is a moderately risky and, therefore, less profitable portfolio consisting of short-term loans, bonds and other instruments with a minimum risk.

Aggressive portfolio

Aggressive portfolio is a highly risky and a highly profitable portfolio, which consists mainly of stocks. These kind of portfolios are generally managed by investors, who are ready to take risks and who are psychologically resistant to large fluctuations.

Moderate portfolio

Moderate portfolio is a balanced portfolio and, as a rule, it is comprised of both high-yield and low-income, but at the same time reliable assets.

The main task of the portfolio investment is to get from the set of investment assets such characteristics, which are unattainable in case of investing funds in a separately taken object. The ultimate goal of creating a portfolio is to achieve more optimal combination of risk and profitability. The risk is mostly reduced, when different non-related assets are included in a portfolio. In other words, the diversification should lead to week decrease of the overall portfolio value, when the value of any asset sharply falls.

Classification of Types of Investment Portfolios

  • by the degree of materialization: non-material and material;
  • by maturity of investment: short-term, medium-term and long-term;
  • by the profitability: high-yield, middle-income and unprofitable investments (investment of the capital in social and environmental projects, which do not seek profit);
  • by the characteristic of participation in investments: direct investments (investor directly takes part in the selection of investee), indirect investments ( investment funds, advisors, mutual funds and others determine the investee);
  • by the degree of risk: high-risk, medium-risk, low-risk and risk-free investments;
  • by type of an investee: real (the purchase of real capital), financial (investment in stocks, bonds and other securities), speculative (the purchase of assets (currency pairs, precious metals, stocks, etc.) exceptionally for making profit through the possible changes of their prices in future);
  • by the level of liquidity: highly liquid (in a short period of time they may be converted into cash), averagely liquid (they may be converted into cash from 1 to 6 months), low liquid (they may be converted into cash from 6 months), nonliquid (they cannot be realized on their own, but only as a part of а property)

In the process of his activity, the investor faces difficulties regarding the choice of an investee with various characteristics. Most of them assume formation of a certain set of investees, in other words - creation of a portfolio. There are numerous instruments which form an investment portfolio, but the main ones are: stocks, bonds, gold, currencies and real estate.

How to Build an Investment Portfolio in 5 Steps

Stage 1: Determination of the investment policy and type of the portfolio.

Understanding your current financial situation and choosing a corresponding investment policy and type of portfolio is a first step to building your investment portfolio. Generally speaking a newly-graduate at the start of their career should have a different portfolio strategy from a 60-year old married person with children.

Stage 2: Determination of the strategy of portfolio management.

There are two basic approaches for portfolio management including active portfolio management strategy and passive portfolio management strategy. The Active portfolio management involves higher than average costs and it stresses on taking advantage of market inefficiencies, while Passive asset management are low cost investments kept for the long term.

Stage 3: Analysis of assets and formation of a portfolio.

The general criteria for including assets in an investment portfolio are the ratios of their profitability, risk and liquidity.There are different ways to fulfil an asset allocation of your choice.

  • Stocks
  • Buying a tiny percentage of company stocks promises to make profit from company growth, but the risk is high since they may also lose their value. To minimize risks, stock buyers usually use funds to invest in them.

  • Bonds
  • Bonds are considered to be safer yet less profitable. They can also be referred to as fixed-income investments.

  • Mutual Funds
  • In contrast to individual stocks buying mutual funds allows you to add instant diversification to your portfolio. Some of them need active management while others don’t. Index funds and Exchange-Traded Funds (ETFs), for example, try to match the performance of a certain market index. ETFs, like individual stocks, can be actively traded on an exchange during the trading day, while index funds can only be bought and sold for the price set at the end of the trading day.

Stage 4: Measuring portfolio performance

You need to evaluate the effectiveness of a portfolio in terms of comparing the factually obtained profitability and risk. Portfolio returns are only a piece of the whole. Without evaluating risk-adjusted returns, an investor cannot possibly see the whole investment picture.

Stage 5: Rebalancing your portfolio on time

Over time your investment goals may change or your previously chosen allocation may be ruined. Audit of a portfolio is vital in order not to make its content contradict the already changed economic situation, the investment quality of securities and the goals of an investor.

Why you need to try portfolio trading in financial markets?

With the development of personal composite instruments PCI (GeWorko Method), there appeared a convenient opportunity of trading portfolios of variety of assets in the financial markets instead of trading separately taken instruments. Through this technology portfolio trading is realized on the basis of two portfolios similar to the trading of separately taken financial instruments, when one asset (base portfolio) serves as the base part, and the other asset (quote portfolio) serves as the quoted part.Portfolio trading is more efficient in contrast to trading large numbers of individual securities. This also is a great way to rebalance one’s portfolio with ease and more confidence in the result.

In addition, a trader gets the opportunity of trading his own unique instruments, which are resistant to market volatility, forecasting the optimal combinations of profitability and risk and analyzing the behavior of his instruments on the basis of historical data. Portfolio trading through this technology is possible only on the professional trading platform NetTradeX.

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