Building an investment portfolio

This article will give some aspects of building an investment portfolio.

An investment portfolio can consist of any and several asset classes that give return. Often portfolios consist of stocks, bonds, commodities, or currency. Portfolios can consist of any other asset class as well.

Choice of asset class

When building a portfolio first the asset classes should be chosen. Here one might go with personal interests and preference. Usually, however, beginning investors tend to start with stocks or funds. A balance between different asset classes would ensure spreading of risk. Also, diversification within an asset class such as stocks would further ensure risk spreading. When risk is spread, generally risk is also decreased.

Choosing a ratio within and between asset classes

When assets are chosen the amount invested into each one could be considered. If building a stock portfolio, one might invest a smaller percentage into risky stocks and a larger percentage into less risky stocks. Furthermore, if the current market conditions are uncertain, one might want to invest less in stocks since they fluctuate with markets, and more in other assets that does not fluctuate as much with markets, or in assets that perform well in uncertain conditions. These could be commodities or bonds.

If one chooses to build a portfolio of stocks and bonds, consideration of the ratio between the two asset classes may benefit the portfolio. A high risk portfolio for example, would have a higher amount of stocks than bonds in the portfolio. An example for ratio of a risky portfolio could be 85% stocks and 15% bonds. The more uncertain market conditions are, the higher the ratio of bonds would be in the portfolio as bonds are more stable over time and perform well in such market conditions. More clearly, the ratio between stocks and bonds would fluctuate with ups and downs in the market.

Active vs. passive investors

Building a portfolio requires the investor to make active choices, and to keep track of the portfolio, for it to be successful. If an investor is more passive, funds would probably be a better choice. But still, investing in funds means giving away ones money to someone else so that they manage it. Active investors can both have larger flexibility and choice in the portfolio, as well as potentially higher returns, since they fully determine the contents of the portfolio.