So you want to know how to build an investment portfolio for beginners. Do you know what asset classes you should pick and how you can manage the risks that come with all investments? We'll take you through some key basics to plan and build your portfolio based on your risk appetite and financial goals.
Investing can bring you a great deal of potential returns, as well as some degree of risk. While you can't completely eliminate investment risk when building a financial portfolio, you can certainly manage it.
The best way to navigate risk is to develop a diversification strategy for your investment portfolio and not "put all your eggs in one basket". That is, you shouldn't rely on one single product or family of products for returns.
Here are some steps you can take to diversify your portfolio.
A well-diversified financial portfolio should include stocks, bonds, other assets and of course, cash. Get to know these different types of investment tools and the investment risk levels they carry, weighing all of that against your own risk appetite and how long you want to be investing.
The cash portion of your portfolio should amount to 3-6 months' worth of your living expenses. This is called your emergency fund, which acts as a buffer for you in case something unexpected happens.
Some different investment portfolio examples include mutual funds, exchange-traded funds (ETFs) and index funds. These are all great ways to introduce diversification to your financial portfolio. With a mutual fund, a fund manager will help invest your capital in a diversified selection of securities. An ETF gives you a bundle of securities you can trade on an exchange, just like a stock.
Systemic Investment Plan (SIPs) are small and disciplined investments in mutual funds that you can contribute to on a monthly basis. SIPs help get you into a regular saving habit, which can lead to better results than investing a lump sum. With a SIP, you can invest with as little as INR500 every month.
An index fund, on the other hand, is a type of mutual fund that aims to track the performance of a chosen financial market index like the NSE Nifty Index and BSE Sensex. A portfolio that invests in all or part of the constituent stocks (or constituent bonds) of that index would then be created.
With these asset types, your money is automatically spread over a selection of securities from a variety of companies, instead of just one. This lowers your exposure to risk.
Say your portfolio consists solely of 10 of the biggest property companies in India. When the government announces a new policy affecting property auctions, real estate companies see their stocks plummet.
Because you've invested in all the same type of stock, and they're positively correlated, they tend to trend the same way.
A better diversification strategy is to look for assets that are negatively correlated: if one asset declines, the others are likely to remain stable or might even see a boost in value.
If diversifying within a single asset class is a good idea, then diversifying across asset classes is a great idea. Instead of just sinking your money into stocks, you could consider adding bonds to your portfolio, because in general, when stocks go down, bonds may not necessarily go down (and vice versa).
Choosing investment assets with different return of investment (ROI) rates is a good idea to both mitigate risk and optimise returns. That way, you may be able to use the larger gains from higher yield investments to offset any losses that other assets in your portfolio may bring.
You could start looking at alternative asset classes to diversify your portfolio. Consider gold for instance – it's what you'd term a "safe haven investment". This type of investment is expected to maintain or even go up in value during periods of economic volatility or when the market is softening.
"Lifecycle investing" is a strategy developed by economists Ian Ayres and Barry Nalebuff[@lifecycle-investing]. It's based on the principle that a younger investor with a longer financial investment timeline can potentially take on more risk than an older person.
With this strategy, you subtract your age from 100 to determine your asset allocation split. So if you're 25 years old; your asset allocation would be 100 minus 25 = 75, which would produce a portfolio that is 75% made up of stocks and funds and 25% bonds. Your 55-year-old mother, on the other hand, would be looking at a portfolio that is 45% stocks and funds and 55% bonds.
This is only one investment strategy when you're learning how to build an investment portfolio for beginners. You still have to consider your personal attitude towards risk and your financial goals, in order to pick the most suitable assets for your portfolio.
A long-term investment strategy doesn’t have to mean picking a fund and then doing nothing with it. Active investing means taking investment opportunities and adjusting your strategy for long-term growth. Keep tabs on your portfolio and check to see how it's performing, or have your fund manager provide regular updates on your returns.
Investments can go up and down. It can be tempting to sell in a market crash. Over the long term, however, investments tend to go up. The longer you stay invested, the more likely you are to see positive returns. That’s because you have more room to handle market volatility.
The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested.
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