Forming an investment portfolio: tutorial for beginners

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An investor’s main instrument is an investment portfolio, the composition of which depends on many factors. What is an investment portfolio and what its composition depends on, we will talk further.

What is an investment portfolio

An investment portfolio is a set of financial instruments owned by an investor. We are talking about securities, precious metals, unit investment funds, financial derivatives, and other assets. This tool received this name at a time when trading on the exchange was carried out offline. Investors bought, for example, stocks in documentary terms and put them in a portfolio. Some even had a separate portfolio for securities. Over time, exchange trading went online, but the name remained.

Types of investment portfolios

There are different classifications of investment portfolios. They can be classified according to the degree of risk, according to the degree of the investor’s involvement in the portfolio management process, and according to the timing of the investment.

According to the investment period, investment portfolios are divided into:

  • Short term. Such a set of assets is intended for investment within 1 – 2 years. Therefore, the main requirement for assets included in such an investment portfolio is liquidity. Liquid instruments include stocks, short-term bonds, options and futures.
  • Medium term. When compiling such a portfolio, the investment period is increased to 3 – 5 years. As a rule, the owner of such a portfolio expects to receive income, both in the form of dividends and through the resale of assets at a higher price.
  • Long term. This is an investment portfolio for the long term. The investment period in this case is 5-10 years. And sometimes more. Choosing assets in such a portfolio, the investor expects that they will bring him income in the future. For example, investing in startups.

By the level of risk, investment portfolios can be divided into:

  • Conservative (defensive). This type of portfolio is intended for risk-averse investors. Therefore, in the composition of conservative portfolios, as a rule, low-risk assets. These include shares of large and reliable issuers, deposits, federal loan bonds. They have a fairly predictable return. Therefore, this type of asset is suitable for novice investors. This will allow you to understand the essence of investing without the risk of losing a lot of money at the very beginning.
  • Aggressive. This type of investment portfolio is suitable for gamblers and those who are not risk averse. The assets included in the portfolio are the most high-risk and unpredictable. Their price can either rise several times or drop sharply. Such assets include: options, futures, cryptocurrency, venture capital investments, and other highly profitable but high-risk assets. This type of investment portfolio is not recommended for beginners. They are suitable for more experienced investors who are able to correctly assess the risks.
  • Moderate (balanced). This is an intermediate option between a conservative and aggressive investment portfolio. It is suitable for investors who are willing to take risks within reasonable limits and do not forget about defensive assets. A balanced investment portfolio is the ratio of conservative and high-risk instruments. Therefore, along with blue-chip stocks and federal loan bonds, it also includes higher-risk assets.
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Another type of classification of investment portfolios is the classification according to the degree of investor involvement in asset management. On this basis, investment portfolios are divided into:

  • Active. This type requires constant attention from the investor. It includes assets that need to be managed. For example, high yield bonds, startup stocks, IPOs, etc.
  • Passive. The assets included in such a portfolio do not require the investor to constantly manage and monitor the market situation. Therefore, as a rule, the structure includes shares of mutual investment funds, precious metals, dividend shares of stable issuers.

Investment portfolio formation stages

In general, the process of forming an investment portfolio consists of the following stages:

  1. Determination of the financial goal. Not only the investment strategy depends on this, but also the composition of the portfolio. The goal should be quantifiable and have a specific term and monetary value. Determine for yourself what you are investing for and what result you plan to get. Ensure yourself a comfortable old age? Save up for the education of children? Going on vacation to Cyprus next year? The answer to this question will determine which instruments it would be advisable to include in your investment portfolio.
  2. Definition of an investment strategy. The choice of strategy depends on factors such as: financial goal, investment horizon, the size of the initial investment and the expected return. It will also not be superfluous to determine how much you can spend monthly on investments, whether you plan to withdraw the income received or send it for reinvestment. Taking into account all these factors, it is necessary to determine the investment strategy, on which the composition of the investment portfolio will depend.
  3. Determination of the risk profile. The risk profile is the level of risk appetite. Investments are not only an opportunity to receive additional income, but also the likelihood of losing your investments. And the more risky instruments are included in the investment portfolio, the more likely it is that under unfavorable circumstances the investor can lose money. Therefore, first you need to determine your maximum acceptable level of risk. Are you ready to put everything on the line in the hope of getting a big income, or prefer not to risk it. The risk profile can be determined using online tests. After analyzing your answers, the system will itself determine the level of risk appetite and select the approximate composition of the portfolio, in accordance with it.
  4. Choice of assets. Once you determine your financial goal, your risk appetite and investment strategy, you can start choosing assets for your investment portfolio. Based on the listed parameters, select the most appropriate portfolio type and select assets accordingly. If you cannot do this on your own, then you can contact professional consultants. The investment consulting service is available both at brokers (INGOT Broker, Tigerwit, etc.) and at specialized platforms that provide a full range of investment services (SquaredFinancial, Asset Capital Business). Investment advisors will not only help to determine the composition of the portfolio based on the needs of the investor, but also, if necessary, will help to adjust the strategy.
  5. Gaining access to financial markets. There is always an intermediary between the investor and the exchange – a broker. Without his participation, it will not be possible to gain access to investment instruments. Therefore, opening a brokerage account is an important step. Only after that there will be an opportunity to acquire assets. When choosing a broker, you need to pay attention to the availability of a license, terms of trade, the range of assets, its reputation and place in the rating.
  6. Evaluation of efficiency and portfolio rebalancing. In order for the investment portfolio to meet the goals and the chosen strategy, it is necessary to periodically revise it. Get rid of unprofitable assets or, conversely, buy the necessary ones. It will not be superfluous to periodically review the ratio of high-risk and conservative instruments and monitor their compliance with the strategy.
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Thus, the formation of an investment portfolio is an individual and rather complicated process. When choosing instruments, it is necessary to take into account a number of factors that will affect the composition of the portfolio. Therefore, in order for investments to be effective and bring the desired result, you need to carefully consider the process of forming a portfolio. If it is difficult to do this on your own, it is better to seek help from specialists than to acquire assets at random.


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