By Ulvi Hagverdi
DISCLAIMER: This is not an investment advice in any shape or form but a friendly guideline for those of you interested in the world of investing.
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With the growth of no-commission trading platforms and investment tools, portfolio management has become quite a widely used term lately. But, what exactly is “an investment portfolio” and what steps can beginners take to dive deep into the world of investment?
The concept of “portfolio” dates to the beginning of the previous century. Stockbrokers used to utilise a separate portfolio for each client’s physical shares. In today’s world, an “investment portfolio” encompasses all the assets an individual has invested in, from real estate to the most complicated equity funds. An investment portfolio can include only one type of investments, such as stocks, or numerous investment types, such as commodities, bonds and indexes.
Interestingly, there usually exists a presumption between the beginners of the investor community that you have to dedicate a drastic amount of time and energy to build a profitable portfolio. Although this can be the case for the larger-scale investments, it can be emphasised that this statement does not apply to investors taking initial steps. So, what are the primary factors you have to take into consideration when launching your portfolio?
Most importantly, one should decide on the level of risk that he/she can take. Experts usually advise that this level should depend on the age of the investors. Younger investors are encouraged to focus on risk assets, such as stocks of growing companies, while portfolios for the elderly are recommended to be based on more conservative and safer assets, such as government treasuries.
An essential technique to decrease the general probability of losses, advised for all type of investor, is called diversification. This can be achieved through asset allocation – splitting up the portfolio to various kinds of investments with varying risk levels. For example, a retiree in the US with minimal risk tolerance would be advised by the financial experts to divide his portfolio into 90 per cent bonds and 10 per cent stock market. Conversely, a young professional with fewer responsibilities would be encouraged to allocate funds on the stock market heavily.
Having emphasised the generic techniques, it is worth to note the exact tools and funds you can utilize to build your portfolio. First of all, you will need an investment account for this process, regardless of being anywhere in the world. In the US, using a 401(k) or Individual Retirement Account is a common method. Globally, no-commission trading platforms, such as Robinhood and eToro, offers simplified platforms. Nevertheless, there might be specific fees occurring in the course of your investment, such as margin fees while using leverage.
When it comes to exact investment types to use, you can start from the safest assets, such as US government bonds, to consolidate the risk aversion of your portfolio. One of the easiest and popular ways would be investing in equity indexes, such as S&P 500 (index for the biggest 500 US companies) that has 7 per cent annual return historically. For this kind of large-scale indexes, the long-term buy-and-hold technique is advised as short-term events can lead to losses. On top of the long-term patience, the compound interest (annual profits to be reinvested) is regarded as the key to building wealth.
For those lacking enough time and efforts, mutual funds – indexes investing in various types of investment – would be the ideal tool to benefit the general growth of the securities and stock market. Nevertheless, these funds may also be actively managed, requiring further fees to update the allocations and passively managed, meaning that further research would be necessary to attain this fund.
However, deciding on your portfolio and realising these transactions through a platform is not the end of the process. As the values and ultimately the allocation of various investment might fluctuate over the time, one is advised to revisit to portfolio from time to time to arrange the stakes back to the original allocation. This is called rebalancing.
Wealthyhood, alongside “Do It Yourself” and commission-free wealth management functions, also offers automatic rebalancing for busy individuals.
Furthermore, the investment banks and financial experts charge various fees depending on the investment, thus the cost-benefit analysis should be made before deciding on whether making or not making the investment. In short, investing has been simplified in the last decades, and many effortless indexes exist to open the door of the universe of the investment for non-experts. Nevertheless, as this is a process where significant losses can be easily recorded, it is always a brilliant idea to gain basic financial literacy and research various methods before launching your survey.
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