Investment Portfolio: How to Best Build and Manage One

Investment portfolio management sounds like a vocation reserved for financial gurus and entrepreneurial savants. However, understanding how to build and manage your individual investment portfolio is invaluable knowledge for anyone looking to grow their wealth. 

Even if you chose to invest in a pre-built, model investment portfolio, a familiarity with the keystones of portfolio management will help you choose the right one.

What is an Investment Portfolio? 

An investment portfolio is a group of financial assets. The typical portfolio definition encompasses investments like stocks, bonds, and cash. However, a general investment portfolio may also include exchange-traded funds (ETFs), bonds, commodities, real estate, cryptocurrency, NFTs, art, and even cash or cash equivalents. 

Portfolio investment definitions vary depending on the investor and the asset classes they are investing in. For example, a real estate company’s investment portfolio may be comprised of a number of commercial and residential property holdings. In contrast, an individual investor’s portfolio could feature stocks and ETFs.
 Invest now

Investment Portfolios and Diversification 

Portfolio management is based on the concept of diversification. Putting all of your money into a single investment is risky. You wouldn’t want to put all your eggs in one basket, as the old adage goes. Instead, you can cushion yourself from volatility by spreading your investments across various asset classes. 

This theory works much like the agonist and antagonist muscle pairs in your body. You have some muscles that contract (agonist) and others that relax (antagonist). When you contract your bicep, your tricep relaxes. Each serves a complementary function.

Likewise, a portfolio with stocks in a single, narrow market sector might perform well in a low-interest rate bull market but crash in a bear market. This could prove devastating if you need to pull funds from your portfolio when the price is down. 

As a hedge against risk, savvy investors might split their portfolio between growth stocks, blue-chip stocks, bonds, real estate, and commodities. This way, if interest rates rise and the value of their growth stocks contracts, their holdings in bonds and commodities could pick up the slack. 

Not everyone has the time for in-depth research into various financial assets and company profiles. In that case, ready-made investment portfolios like mutual funds typically provide investors with broad market exposure (diversification) minus the homework. 

Just as there are various asset classes, there are also different types of investment portfolios. The next section will explore several of these types through examples.

Types of Investment Portfolio with Examples

Investment portfolios come in all shapes and sizes. Choosing the right one for you depends on your risk tolerance, your age, your financial situation, and a host of other factors. 

.

Model Investment Portfolio: Examples

A model investment portfolio is a ready-made, professionally managed collection of diversified assets aimed at earning an investor a return on their investment while reducing risk. 

For example, you can typically explore model portfolio investments based on your financial goals, ethical leanings, or risk tolerance (conservative, moderate, aggressive). One should also keep in mind that returns may be taxable, so an investment portfolio example for the U.K. may have different considerations than one for France. Luckily, you can specify, “model portfolios U.K.”, for example. 

Below we will enumerate various investment portfolio strategy examples. 

Income Portfolio: Example 

It should come as no surprise that income portfolios are designed to produce income for the investor. Therefore, these portfolios are primarily assembled from stocks that pay dividends and coupon-yielding bonds. 

Income portfolios are great for investors that have a low-risk tolerance and a mid- to short range investment window. Here are some income producing personal investment portfolio examples: 

• 100% Bonds — As interest rates rise, so do bond yields. With interest rates at all time highs, many investors are looking into bonds, which are typically considered a safe, stable investment. You don’t have to worry about sudden swings in value, and you’ll receive fixed returns. One caveat is that some bonds are not traded in the secondary market, like stocks, so the value of the actual bond may be fixed. 
• Stock/Bond Split — A split is often an example of a good investment portfolio because investors get the best of both worlds. The split could be 20% stocks/80% bonds, 50%/50%, 20% bonds/80% stocks, etc. The more a portfolio's ratio is composed of stocks, the more growth potential it typically has. This also means more volatility and requires a higher risk tolerance. 
• 100% Stocks — Recall that stocks associated with income portfolios will pay dividends. Some companies, like Disney (DIS), do not pay dividends, so they would not be included in such a portfolio. Unlike some bonds, stocks are traded in the secondary market, so they may increase, or decrease in value over time. However, dividend payments are dependent on the number of shares, rather than the shares value. 
• Income Investment Trust Portfolios — Investment trust portfolios are great for retirement. They consist of income-producing assets that typically belong to a family. The portfolios are usually managed for a trustor by a trustee who will pass on the portfolio's assets to a beneficiary. 

Income portfolios are generally great options for those who want a stable source of income during retirement due to their income producing assets, and the ability to calibrate them to your needs. 

Invest now

Aggressive Investment Portfolio: Example 

The fundamental principle of aggressive investment portfolios is that higher-risk often comes with the potential for greater rewards. This strategy is primarily about capital appreciation, rather than producing a stable income or playing it safe. For that reason, aggressive investment portfolios typically focus on stocks. 

Here are some example of asset allocations that would be considered aggressive: 

• Portfolio A — 80% stocks, 10% commodities, and 10% bonds. This allocation provides some income producing assets, but in a bear market, 80% of your investments would be at risk. 
• Portfolio B — 90% stocks, 10% commodities. This is an even more aggressive allocation than portfolio A. There are no income producing assets, and 90% of your investments are at the whim of the market. 

Would you like to know how to start Investing with Little Money? Watch this video:

The relative “aggressiveness” of a portfolio is also based on what kind of stocks are being invested in. For example, a portfolio based on growth tech stocks would be much more aggressive, and much more risky than one based on blue-chip stocks. 

If you look back to 2020-2021, growth tech stocks saw massive growth and outperformed the S&P 500. However, as interest rates rose and the economy became more volatile, the value of growth tech stocks saw a precipitous decline. 

Aggressive investment portfolios are typically better for young investors who can handle greater risk, rather than someone nearing retirement. Furthermore, aggressive investors must pay close attention to market fluctuations and economic forces so that they can sell, or buy, at the right times. Many investors in growth tech stocks saw their brokerage account balances balloon in 2021, only to watch those potential gains slip away in 2022. 

Conservative Portfolio: Example 

Low-risk tolerance and a time horizon exceeding three years are the key elements of any conservative portfolio. Conservative investors are primarily concerned with protecting their money from inflation and avoiding the pitfalls of market volatility. 

A conservative investment portfolio might consist of bonds, cash and money markets funds, and stocks. While simply holding cash is not risky in a typical investment sense, there is a risk that it will lose value due to inflation. However, having a substantial amount of cash ready prepares one for stock market volatility. 

For example, if your stock positions fare poorly and you happen to have a financial emergency, you will have to cash out at a loss if you don’t have enough cash on hand to help you weather the storm. Additionally, having cash on hand will allow you to take advantage of bear markets by purchasing stocks at a discount. 

An example of conversative portfolio might look something like this: 

• Conservative Portfolio — 45% bonds, 30% cash and money market funds, 25% stocks. Stocks in a conservative portfolio should be placed in index-funds or other mutual funds with broad market exposure, rather than single growth stocks. One might also hold a stock position in small-cap stocks, and a foriegn stock fund as a further hedge against potentially degrading market forces. 

While conservative portfolios might not be as alluring to those looking to get rich quickly, keep in mind that over time they may fare better overall. Aggressive investors might see massive gains one year, and massive losses the next, averaging out to mild gains or losses. In contrast, a conservative investment strategy is one built on humble, but stable growth, over time. 

Real Estate Portfolio: Example 

When people think about how to build a real estate portfolio they often imagine purchasing properties. While residential and commercial properties are the cornerstone of many successful real estate portfolios, investors that don’t have the capital can opt for real estate investment trusts (REITs). 

REITs trade like stocks, but their value is based on the finance income-producing real estate held by a company. REITs pool the money of many investors, allowing them to have a hand in numerous real estate investments without having to finance or manage properties. 

Let’s look at an example of what a real estate portfolio might look like: 

• Real Estate Investment Portfolio — One rental property, REITs, real estate mutual funds. This portfolio would allow the investor to collect income on a property which may also appreciate over time, while also exposing them to the broader real estate market without having to put an expensive down payment on a property. 

Real estate portfolios don’t have to stand alone. Instead, real estate can become part of a portfolio with allocations in stocks, bonds and other assets. 

How to Build a Portfolio 

The only question more important than “how to build a financial portfolio?” is “how to build a good investment portfolio?”. 

Whether you want to understand how to build a stock portfolio, a real estate portfolio, a dividend portfolio, or an investment portfolio for beginners in the UK, creating an investment portfolio generally consists of a few important steps: 

1. Consider Goals — Investing is a highly individual endeavor. Of course, there are general rules that apply to everyone, but your reasons and goals will set the course. 
2. Allocation — Once you have outlined our goals, it’s time to determine your risk tolerance and decide on your risk allocation accordingly. This step also includes diversification. 
3. Consider Taxes — Depending on where you live, there will be various tax laws that will influence your investment decisions. Does your country have different tax laws for long-term and short-term capital gains? 
4. Select Investments — Now it’s time to pick particular investments. You may choose a pre-built portfolio, or create your own from scratch. Either way, you will have to practice discernment. 
5. Track — Markets are volatile. It’s important to keep up to date on what your portfolio is doing and adjust accordingly. 

4 Tips for Investment Portfolio Management 

Investment portfolio management revolves around risk tolerance, diversification, analysis, and tracking. Below we expand on each of these vital aspects. 

1. Consider the Risk Tolerance

• Time Horizon — It is generally accepted that young investors can handle more risk than older investors who are retired or close to retirement. While this is a useful rule of thumb, it is not axiomatic. For example, a young investor who is in debt, has a medical condition, is about to have their first child, or doesn’t have much expendable income would likely have a lower risk tolerance than an older investor who has plenty of financial wiggle room to take on losses. 
• Investment Goals — Are you saving for a child’s college education? Might you need to take care of elderly parents soon? Are you close to retiring? If the answer is yes, then your investment goals will be more conservative than someone who is merely trying to grow their wealth. Furthermore, your income, and whether or not you have an emergency fund to fall back on will come into play. 
• Investment Experience — If you are new to investing and trading, you may want to tread lightly. It’s easy to get caught up in the trendiest meme stock, or be led astray by financial “gurus”. For an amateur, prudence is an important asset. As you become more acclimated to the market, you will gain instincts and develop strategies that will allow you to be comfortable with more risky investments. 

Perhaps the most important question to ask yourself before investing is whether or not you can live without the money you are about to invest. This is particularly true with stocks. You don’t want to dump your savings into an investment if you might need that money for an emergency soon. 

2. Diversify the Investment Portfolio 

Diversification helps spread your risk around so that the performance of one asset or investment won’t sink your entire portfolio. You may read stories of investors betting big on a single investment and reaping massive rewards, but these stories are popular because they are rare. 

In reality, the market is difficult to understand, even for experts. With this in mind, it’s best to have a balanced investment portfolio in order to hedge your bets so that if one market sector does poorly, your portfolio will be propped up by another. 

3. Analyze the Investment Portfolio

Investment analysis and portfolio management go hand in hand. Think of analyzing your portfolio like getting a physical. You want to identify problems, see what's working, and calibrate your strategy going forward. 

Has your current strategy panned out the way you believed it would? Have your investment goals changed? What have you learned that may have changed your investment outlook? These are all important questions to ask yourself when analyzing your investment portfolio. 

Being nimble and adaptable is key. For example, several years ago, bonds would have been a laughable strategy for many investors, but due to high interest rates, it has become a viable hedge against an unpredictable market. Likewise, growth tech stocks were doing excellent for some time, but what goes up, must come down. 

4. Track the Investment Portfolio

Brokerage apps and platforms have made it easier than ever to track your investment portfolio. It’s sometimes alluring to check your account everyday and attach your emotions to the market rollercoaster, but if you have a solid strategy in place, you won’t need to do this. 

Pay attention to news that will affect your current investments, and check every now and then to see how this news has affected those investments. This will help you build an instinct for market forces, and help you determine when to buy and when to sell. 

Invest now

The Summary

Now that you have a solid portfolio investment definition to work with and you understand how to create a stock portfolio or start an investment portfolio, you can begin designing your own, or, like many smart investors, look into a ready-made investment portfolio. 

Refer back to the above investment portfolio examples to refresh your memory on portfolio asset allocation and how to build a general investment portfolio. 

Remember that the keystone of investment portfolio management is the creation of a diversified investment portfolio. Now that you understand the fundamentals, it's time to start building your own.

1. All about short term low risk investments
2. All about peer to peer investing
3. All about beste geldanlage 2022

* The information in this article is intended for educational and entertainment purposes only and cannot be considered investment advice.