This is a complete guide on how to build an investment portfolio. This can be done by beginners and more advanced investors. This guide teaches you about various investment vehicles in which you could invest your money.
Difference between long term wealth creation & short term wealth creation
While quick profits are considered a bit riskier, if you are not a professional, there is very little chance that you will remain consistent with profits. If you follow the process described above, there will be fewer chances to earn profits.
But, in the longer run, people who invest in form long term make a massive amount of profits from their assets like Stocks, Mutual Funds, Gold, Bonds, etc. When we talk about investment portfolios, we generally talk about long-term wealth creation. But there is no guarantee that you will make profits in the longer run. To get expected profits in the longer run, you must have a great investment portfolio.
The way of creating a good investment portfolio is not an easy task. You should have knowledge of various types of investment fields, not only limited to bank FDs. Plus, you do need to diversify it in order to manage the risk of investment and generate a probable good return.
So, now let’s start with how you can make a significant investment portfolio with proper risk management and get the most out of your investment. I hope that as you have searched for how to build an investment portfolio, you should know what a portfolio is. That’sThat’s why we are not going to explore the theoretical definition of a portfolio.
The first question that appears in our mind when we talk about creating a good portfolio is that –
How many types of holdings should you have in your portfolio?
Every investor should take care of some facts while investing. One of such facts is portfolio diversification.
What is portfolio diversification?
Different kinds of investment options have their advantages and their own disadvantages too. To take the best out of all investment options, we should invest our wealth in different kinds of investment options. This enables us to earn a good amount of returns and also helps us to minimize the risk of wealth loss.
Diversification has great benefits, and the great investors also advise us to diversify our portfolio. But what is this important? Let’sLet’s understand the necessity of diversification of portfolio through some casual stories. Older people invested a lion’slion’s share of their money in just one type of investment asset. For older people, this asset mainly belonged to fixed deposits.
But, this way of investing has some faults. First of all, in fixed deposits, we don’t get a good amount of return like stocks or bonds. Data tells that the stock market’s average return is between 7-10% per year, whereas a fixed deposit only earns you 1-2% interest per year.
So by getting convinced that the stocks market usually generates comparatively better returns than fixed deposits, you may want to invest all your capital (money) in the stock market. Remember the 2020 stock market crash due to Covid – 19? Almost every stock went down by 10-15% in the time span of less than a week. Though the stock market usually generates a good return, the stock market’s main downside is its volatility.
How should you diversity your portfolios?
- Equity Stock market
- Mutual funds
- Real estate & properties
- Cash & fixed deposit
These are the most popular way of investment; still, you can invest in other investment options too.
Risk management in portfolio diversification:
When you invest in stocks or mutual funds, there is always a risk of money. As an investor, we should always take approaches that minimize the risk. This approach is called risk management, and we should always follow this risk management approach in our volatile investments.
It is certain that we all don’t have equal wealth and a similar mindset for taking risks. It is up to you how much risk you want to take. If you take more risks, you will generate more returns, But there remains the possibility of losing money too.
One of the factors you should take care of while managing your risk is your age. Because a younger person has many dreams to fulfill, a younger person can go for riskier investment options than people planning to retire or already retired persons.
As a younger person, you may go for high-risk investment options if you have the power of recovering your losses through your wealth, whereas as an aged person, you should go for low-risk investment options.
Your salary directly controls your risk management. If you earn a decent amount of money from your job or business, you may take a greater risk if you have the confidence to recover any loss that happens within a very few months.
How to design your investment portfolios?
We all already have some of our investments in different kinds of fields. To build a perfect investment portfolio, you don’t need to withdraw all your money from that investment. Especially if that investment is in a bond or fixed deposit, where there is a certain period to stay invested, you will face some penalty if you withdraw your money quickly.
It is foolishness to give a start to your investment journey all of a sudden.
First of all, you have to plan the following things –
- How long should you continue investing your money?
- How long your money will stay invested?
If you have a lifelong for your investment, you should start a SIP in stocks or mutual funds. SIPs build an excellent investment habit. Investment in any field gives you the most when you stay invested for a longer period of time. If you invest in stocks or Mutual Funds, you will get the advantage of compounding. And it will be the duty of compounding to increase your money.
Best practice in making a portfolio:
The best thing that we can suggest to you to build the best portfolio is to do your own research. There are many popular analysis toots known as various types of names like advisor, tickers. These kinds of tools have various types of information about all the stocks with many important financial ratios such as PE ratio, PB ratio, Debt to equity ratio. They also have news about the socks.
We can use these kinds of tools to analyze stocks, mutual funds and find out good stocks to invest in. Whether you are a professional in the market or just a beginner, you can use tools to do your own research and find out quality stocks to hold for the long run. But if you don’t want to use any such kind of tools, you wish you could read the financial statements of companies you are interested in investing in.
These are the – Things to look at before investing in a company:
- Sales and profit growth
- Stock price
Sales and profit growth
The best trick the track a company’s performance is to see the growth in its sales and profit. It tells us about how the company is performing and how it is being operated.
We can use a company’s stock price as the best indicator to analyze how investors trust the company.
Carefully analyze the stock price of the company. If everything is going normal, still the stock price has not gone upward, there may be some issues in the company’s operations.
Other things you can look out for are –
- Cash flow
- Revenue growth
- Net worth
It’s totally on you where you want to invest your money. If you want to take risks to get a better return, you can go for the stock market. But if you don’t want to take any kind of risk and want to earn a fixed amount of money in a certain period, you should look to make your investment in bank fixed deposits.
We advise you to hold your assets as long as possible. The more time you will stay invested, the more compounding it will grow.
As we always advise you that you should pick quality stocks and hold them for several years to get good returns. For that, you will need to make a very powerful investment portfolio. In this article, we have tried to cove the things you should take care of while building an investment portfolio.
This was a beginner-friendly guide for entering the investing world. We have covered topics like how to diversify your portfolio, different kinds of assets you should have in your portfolio, the necessity of diversifications, etc.
We hope that our advice you make you a better investor in the future.