A portfolio is an investment in certain asset classes over a period which gives returns that are greater than the rate of inflation. It is built by carefully selecting certain asset classes and investing in them when they are available at lower levels to reap the rewards when the prices move to higher levels. A portfolio may comprise stocks, bonds, mutual funds, commodities, currency, real estate, and precious metals like gold, silver, and platinum.
Many factors need to be looked into when attempting to build a portfolio viz., capital, time horizon, expected returns, etc. Portfolios fall into many categories based on risk and one needs to ascertain whether one has a low or a medium or a high-risk appetite.
The portfolio and capital must be divided and spread across various asset classes and sectors to minimize risk. Sector rotation too plays an extremely important part in planning a portfolio and a thorough knowledge of economic and market cycles helps in assisting and managing a portfolio. Making the right choice at the right time is as important as rotating the assets from time to time to maintain profitability and maximize profits.
A portfolio can grow in strength only when the market moves up. Many an investor approach the downside of the market to add strength to their portfolios by hedging using the derivatives segment namely futures and options. Many asset classes too can be hedged against other asset classes to minimize losses and maximize profits. Averaging out is another way of reducing costs and maximizing profits. Pyramiding is used by many to add strength to their growing investment and is commonly practiced.
More often than not, the term portfolio is synonymous with stocks and most portfolios comprise only of stocks. Various types of stocks serve various purposes depending upon their market capitalization. Stocks are normally classified as growth stocks, speculative stocks, defensive stocks, income stocks, value stocks, cyclical stocks, and blue chips. A clever amalgamation of all the above stocks in the right quantities at the right time and price results in a strong portfolio which offers a greater return on investment as compared to the return on investment of the market.
Investing in a good portfolio requires a financial commitment which allows it to grow. If one begins to withdraw from funds it will only slow down the process or at worse make the portfolio underperform. One must stay committed to investing in the portfolio for five years and enough funds should be kept aside for regularly investing in the same. One should not withdraw at least for one year and thereafter make regular investments into the existing portfolio to enhance and strengthen it.
Last but not the least, reviewing the portfolio at regular intervals is extremely crucial to its growth. Where some watch their portfolio too closely, others completely forget about it for years on end. A quarterly review is ideal to see if the growth is as per plan. Companies bring out their quarterly reports and these should be studied in the light of one’s portfolio to ascertain if things are moving as per plan. At no point though should one look at his investment daily as this will only lead to anxiety and wrong decisions.
Portfolio building is a very strong way of staying ahead of inflation and creating wealth. The youth should focus on a growth-oriented portfolio whereas the elderly should focus on an income-oriented portfolio.
Emphasis on building a portfolio in one’s life is extremely crucial and should be practiced by one and all alike.
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