More and more people decide to create an investment portfolio each year.
This is a great way to allocate, secure, and grow your savings.
So how even a beginner can start building an investment portfolio and what you should know before?
All basics of creating a profitable trading portfolio by investment managers from Monfex trading platform.
How to Create a Budget & Manage Risks
The basic rule before creating an investment portfolio is to settle all debts. Many people unknowingly often build the so-called financial cushion, but they still have debts in the form of even payday loans, installment plans or just a phone bill. It is worth getting rid of such financial obligations in order to start the investment with a clean slate.
In this case, it is also important to create an additional fund, which is often referred to as an emergency fund.
You can definitely put your financial surplus in your investment portfolio, however, you should also take into account the fact that there may be some really unexpected expenses that will spoil the entire investment plan.
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The emergency fund will perfectly protect us in the event of unexpected expenses, and the investment portfolio will be able to work on us calmly.
Before starting the investment, you should also clearly define the exact risk you are ready for.
Certainly, every broker we ask for help will ask this question. The answer determines the appropriate asset class or allocation to create a suitable investment portfolio for this investor (you).
How to Build an Investment Portfolio?
Creating an investment portfolio should be preceded, above all, by the precise definition of free funds that we want to invest.
It is also crucial to answer the question whether it is to be a short-term, medium-term investment, and perhaps we want to receive profits only at a much later date.
This will certainly allow each broker to choose the appropriate method of portfolio diversification.
An easy way to invest in a diversified portfolio of companies is by investing in stock indices like S&P 500 or NASDAQ. On the long term, top company indices outperform most of the investors.
When hand-picking and adjusting your portfolio, more bonds means safer investments, stocks of multiple technology companies are part of a growth investor strategy, while some conservative investors prefer old and proven companies with high dividends.
If you invest capital only in your country or your industry, your entire investments can grow or fall because of small industry- or country-related news.
It is good to choose companies that you know well but by having a well-diversified portfolio, you can lower the overall risks.
But how to diversify? Some insights on that in the next section!
How to Diversify your Investment Risk?
Diversification of any investment portfolio is broken down into three main types, based on the purpose and horizon of investment, and the type of assets you hold. There are also different markets in the world, this is the so-called international diversification.
The first type separates investments according to the goals and investment horizon that are interrelated and complementary. It largely depends on whether the investment is short-term, medium-term or long-term.
Investments of all time frames should be present in the portfolio, exact allocation depends on personal investor preferences. Such a choice should be made dependent on the time needed for a given investment, however, after having defined the goals in advance.
This will surely secure us the achievement of our financial plans and thus secure the value of our investment portfolio over time. Thanks to this, the investment success is guaranteed.
How diversification lowers risk – Example
A simple way to show how diversification can secure your investments is by illustrating how individual stock prices move vs how the S&P 500 index moves.
Whether you invest in 4 of your favorite technological companies with top IT specialists, buy stocks of largest oil companies or collect one stock from each bank in the world, your entire portfolio can go up and down by dozens of percent.
However, on a mid- to long-term you will most likely lose the simple S&P 500 index which in its turn will lose a better diversified index fund portfolio often consisting of thousands companies (not 500 like in the index).
It is also important what assets you put into your portfolio. They can include not only stocks, but also bonds, futures, indices, funds, currency (Forex) pairs, cryptocurrency derivatives and much more…
In the case of any diversification, it is also very important to invest funds not only in the domestic market, but also outside of it.
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However, it must not be forgotten that in this case foreign markets may be burdened with a much higher risk than domestic ones. This is due to, inter alia, a different type of currency risk, as well as various issues of political as well as economic instability.
Thus, the selection of an appropriate foreign market may, however, guarantee a rapid growth of the invested capital. However, such investments should be closely monitored, and if we find that the situation becomes too dynamic and uncertain, it is worth immediately withdrawing the assets with a profit. Such action will allow us to minimize the risk of losses in our investment portfolios.
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This is a short summary of this article reviewing the basics of diversification and investment portfolio creation to help you structurize the information:
- Before starting to invest, make sure you don’t have debts;
- Create an emergency fund for unexpected expenses;
- Allocate some amount of money on investments;
- Decide about the level of risk you are willing to take;
- Divide your portfolio in several parts with investments of different timeframes, different industries, different markets, countries and asset types;
- Allocation of each particular asset depends on personal preferences and investor risk aversion.
So, not to lose a big part of your investments and on average grow with or better than the market you simply need to pick a sufficiently-varied range of good investments.
You can start trading already now.
Just create an account on Monfex investment platform right here!