How to Build a Profitable Investment Portfolio
It is widely acknowledged in the investment industry that a high quality and well-maintained portfolio is crucial to any investor’s success. As an individual investor, you need to be able to determine what asset allocations best work towards your personal investment strategies and goals. Working with an asset management company is an insightful and useful way for building a truly profitable investment portfolio. An asset manager can help you determine your goals, and strategically identify investments that will maximize property value and expected returns.
Determining the Right Asset Allocation
Determining your financial situation and investment goals is the first step in constructing a profitable portfolio. To start, it’s important to consider your age – how much capital is available for you to invest at this time, and how long will it take to successfully grow your investments and enjoy their rewards?
Apart from age and time, it helps to consider your personality as an investor, and your ability to deal with the effects of unpredictable slumps in the market. Ask yourself, “am I willing to risk money for the possibility of achieving greater returns?” Everyone certainly aspires to earn high annual returns on their investment, but if the stress of profit takes a toll on your well-being, it might be better to re-evaluate your investment strategy, because at the end of the day, your investments should support your lifestyle and allow you to live better. Properly assessing these factors with the help of your asset manager will determine how your investments should be designated amidst different asset classes.
Achieving Your Portfolio
Once you’ve determined the asset allocation that best suits your investment goals, the next step is dividing your capital among the appropriate asset classes. Here are a few different ways to decide on the assets and securities for your asset allocation strategy:
Mutual Funds: Mutual funds allow you to hold bonds that are researched and selected by fund managers on your behalf. Your fund manager will charge a fee for their services, and earn a commission from your returns.
Choosing Bonds: There are many factors to considering when choosing bonds, such as the bond type, rating, maturity, coupon, and the interest-rate environment.
Bonds come in different varieties, and are most commonly: government, corporate, convertible, callable, and municipal.
The bond rating refers to the grade a bond receives based on credit quality and there are several factors that go into the rating.
Bond maturity is the date in which the transaction ends. This is used for deposits, foreign exchange, forward transactions, interest rates, etc.
Coupon refers to the annual interest rate paid on a bond, which is shown as a percentage of the face value. The interest-rate environment refers to the percentage charted by a borrower for the use of assets, and normally noted on annual basis.
Choosing Stocks: It is important to choose stocks that align with the risk level you want to bring into the equity portion of your real estate portfolio. This method requires the most work, and continuously monitoring your holdings for price changes. Some factors to consider include market cap, stock types, and sector.
Market cap, also known as market capitalization, refers to the total dollar value of a company or individual’s outstanding shares. It is determined by multiplying the total number of shares by the current market price of one share.
Stock types refer to the classification of stocks, mainly common stocks, stocks with embedded-derivative options, hybrid stocks, and preferred stocks. Each stock type comes with their own pros and cons, and are best suited for certain portfolios.
Sector, not to be confused with industry, is broad term referring to a specific area of the economy that businesses share the same or related services and/or products. For example, the financial sector would refer to banks, credit-card companies, and insurance providers, just to name a few.
Exchange-Traded Funds: If you do not prefer investing in mutual funds, exchange-traded funds (ETFs) may be a viable alternative. ETFs are, in the simplest of terms, mutual funds that trade like stocks. They’re similar to mutual funds in that they represent a large number of stocks, but differ in that they’re not actively managed. Because ETFs are not actively managed, they offer more cost savings over mutual funds.
Reassessing Your Portfolio
After your portfolio has been established, it will need to be periodically analyzed and rebalanced, as market movements may cause your initial weightings to change. There are several other factors that may change after a period of time, such as your financial situation, risk tolerance and future needs. If any of these factors change, you’ll likely need to review and adjust your portfolio accordingly.
The best way to achieve a profitable portfolio is by consistently reviewing and determining the long-term growth of your investments. This will protect your assets from the risks of large declines, as well as structural changes in the economy over time. By monitoring how diverse your portfolio is and making necessary adjustments when relevant, you will greatly increase your portfolio’s success and long-term finances.