Managing a portfolio is really an art form. It represents the careful balance between intuition and science; you need to select and oversee all of your investments to ensure that they fulfil your long-term goals. Traditionally, a lot of investors would hand off their portfolios to be managed by a third party. However, more and more people are beginning to manage their own investment portfolios in areas like tech property and finance. In doing so, you can save yourself some money, and all it really requires is understanding a few key principles.
An Introduction to Portfolio Management
Portfolio management is a job role in its own right, and in the past, portfolio managers would work on behalf of clients in order to look after their investments, the end goal obviously being creating the biggest return on investment and maximizing profit, all while mitigating risks. In order to successfully build and manage an investment portfolio, you need to be able to identify opportunities, visualize threats and weigh the strengths and weakness of your options.
There tends to be two opposing approaches: passive and active management, both of which are arguably pretty self-explanatory. Passive management is more of a long-term approach; it is about investing and waiting for those investments to come to fruition. There are several assets which need to mature in order for you to see a return on your investment. On the other hand, active management is obviously more involved. An investor buys and sells assets and stocks regularly in order to make money. Your approach will depend on what you are investing in.
Popular Asset Classes
There are several different asset classes that a successful investor is likely to embrace. One of the most popular being equities or stocks, which is essentially a small share of a publicly owned company. Companies sell shares of their business which then allow the average person to own a very small percentage of the business. You can purchase stocks in a number of businesses. As the company performs well, the stocks are then worth more, and you can then choose whether or not you want to sell the stocks for a profit or hold out for more. There are a few different forms of stock which pay annual dividends dependent on revenue.
Bonds, which are also known as fixed-income securities, are another popular choice. A bond is essentially a reverse loan. You give a business of the government some money, and once the bond matures, you receive your money back with interest. They tend to be incredibly low-risk, offering consistently stable returns. There are government bonds, saving bonds and certificates of deposit. So, make sure to explore your options.
Next, there are cash equivalents. These assets are, as you are likely to guess, made up of short-term deposits, cash and cash equivalents. They are defined by their liquidity, meaning that they are easy to buy and sell quickly. They are often recommended for investors who regularly redistribute or reallocate their funds. Most cash equivalent investments are short-term because they are designed to give the investor returns as quickly as possible. For example, a short-term bond or treasury bill would count as a cash equivalent investment.
Marketable commodities are also worth exploring. These forms of assets do tend to retain their value for a longer period of time. Investors purchase the commodities either physically or via the stock market. Examples would be artwork, precious metals, electricity, natural gas and even wheat and corn. Most investors hold these commodities waiting for the right time to sell in order to make a profit. Depending on the form that the commodities take, you might also gain access to dividends and other yields while you hold the commodities too.
Finally, investing in property or real estate is also a great choice. This is because property very rarely depreciates in value; it tends to hold value well, and more often than not, it appreciates. It is a great investment because it offers high returns and profitability. You can choose to invest in buildings, commercial real estate, rentals and even empty lots. In addition to this, there are also real estate investment trusts and funds, which allow you to benefit without actually purchasing the property itself.
Allocating Assets
One of the most important elements of portfolio management is asset allocation. Ensuring that you have a mix of assets is key. This usually means procuring a good mix of stocks, bonds and alternative investments like property, cryptocurrency and commodities like gold. Creating this mix can be a challenge which is where businesses like Trading View comes in, allowing investors to track the XAUUSD price. This principle hinges on the understanding that some assets will be less risky than others, creating a more robust portfolio that can withstand a few hits. Of course, you can build a sturdier portfolio which leans more towards conservative investments. However, it does often take longer to see profits, and it can also limit your potential returns.
Diversifying
Asset allocation and diversification are somewhat similar. When investing, there are a lot of mitigating circumstances which can affect the value of your investments at a moment’s notice. This makes it incredibly difficult to consistently predict your wins and losses. This is why diversifying your portfolio is important. It ensures that your portfolio has safeguards against risk. You should be striving to spread the risk of your investments within a single or different asset classes. It is difficult to know which sector is likely to perform the best, but the goal of diversification is to seek returns across all possible sectors while reducing the overall volatility of your portfolio.
Rebalancing
Rebalancing is often done at regular intervals; some people like to do this annually, but it can be done bi-annually or after every fiscal quarter. It is the act of returning the portfolio to its target allocation because sometimes the different markets will force your portfolio out of balance. Most investors allocate different percentages to their asset classes, and during the close of play, they find that these percentages have shifted, which has created profits but also left the portfolio open to more risk. Rebalancing occurs when you sell off the overflow or buy back assets that you have sold during the market growth.
In Summary
There are a number of things that go into being a successful investor. Everyone wants to grow their money and make sound financial decisions. Managing your portfolio is key to ensuring that your investments remain healthy. You can absolutely choose to manage your own portfolio; although this will be a learning curve for you, or you can choose to hire a professional however, this will obviously constitute an extra expense. Think about the approach that you want to take to portfolio management and whether you are leaning more towards a passive or active approach. Leaving your money in stable investments like index funds and allowing them to mature requires minimal intervention but also doesn’t necessarily produce the highest rewards. On the other hand, you can choose investments which require more active management, they are more challenging, but they do have a higher return potential. Regardless of the approach that you want to take, you will still need to have a good understanding of the different asset classes available to you and the basic portfolio management tools like asset allocation, risk management, diversification and rebalancing.
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