A Comprehensive Guide to Managing an Investment Portfolio

A Comprehensive Guide to Managing an Investment Portfolio

As an investor, it’s important that you build and take care of your investment portfolio. It can show other investors what you have attained and lost during your journey as an investor.

There are things that you must consider when building your investment portfolio. You should learn the purpose of diversification and why it is important for any and every portfolio. There are also investment terms that you should familiarize yourself with when dealing with your portfolio.

In this article, we will be discussing the basics of investment portfolio, what it is exactly, as well as how you could build and manage it along the way. Without further ado, let’s get started.

portfolio building infographic

What is an Investment Portfolio

The business dictionary defines an investment portfolio as a:

“Pool of different investments by which an investor bets to make a profit (or income) while aiming to preserve the invested (principal) amount.”

An investment portfolio is a collection of income-producing assets that were bought specifically to meet your financial goal. Normally, a portfolio is owned by an individual or by an institution. It’s also ideal for a portfolio to have a certain degree of diversification in order to avoid the risk of putting everything in one class.

Your portfolio is essentially an account made up of different types of financial products most commonly known as assets.  Its size will be based on the value of the total investments within your portfolio at any given time.

When choosing your investments, you can base the decision on various risk-reward combinations. These combinations include low risk, low yield, or high risk, high yield investments. There are also different types of income streams to consider, such as steady but fixed, or variable but with potential for growth.

An investment portfolio is different from portfolio investment, wherein you take part of passive investment of securities found in a portfolio.

Read more about foreign portfolio investment.

The investment portfolio has grown in popularity in the past half-century. It acts as proof of the successes and downfalls that you’ve gone through during your investment journey.

knob with choices of asset classes

Assets, Sub-Assets and Investment Vehicles

There are various asset classes that you can choose to add to your portfolio. These include stocks, bonds, and cash. Other than the major asset classes, there are also sub-classes you can choose from to further diversify your portfolio. These sub-classes include large cap stocks, mid-cap stocks, small cap stocks, and international stocks. In terms of bonds, you may get to choose from short-term bonds, intermediate-term, tax-exempt municipal bonds, and foreign bonds.

The division does not entirely end there; you can still find subdivisions of asset classes and sub-asset classes.

Some of the investment vehicles used may include mutual funds, ETFS, and individual stocks and bonds.

You can view all your investment holding across different account types as a single overall portfolio, or you can decide to segment certain portions as separate portfolios.

As you diversify your portfolio, you might notice that not all of you investments are correlated to each other. That’s fine. This just means that you’re able to spread out the risks that one asset class carries.

Nowadays, everyone seems to know what it means when people tell you to diversify your portfolio. But it wasn’t always that way.

Learn more: Asset Allocation: Your Roadmap to a Powerful Portfolio

Words investment portfolio printed in white bond paper

A Brief History of Investment Portfolio (How it came to be)

The investment portfolio was not always as popular as it is now. It started out as a largely ignored doctoral thesis back in the 1950s.

The Beginning of the Portfolio Theory

During the 1930s, the time before the advent of portfolio theory, people still had “portfolios”. Despite having the same names, people perceived their portfolios differently as well as the primary method of building one.

In 1938, John Burr Williams was able to accurately depict the thinking of people during that time in his book called “The Theory of Investment Value”. This made way to the dividend discount model which showed the goal of most investors: to find a good stock and buy it at the best possible price.

During this period, the perception of investing as a form of gambling was widely believed. There was no known investor that gave too much thought into the possible risks that accompanies investing. Nevertheless, there were still those who thrived in this kind of environment. Professional managers were able to make huge progress through data gathering and analysis.

Markowitz’s Theory

Let’s now fast-forward a couple of years.

25-year old grad student Harry Markowitz was searching for a topic for his doctoral thesis when he encountered a stock broker who started him towards the path of writing about the market. This was when Markowitz read John Burr William’s book. Upon reading it, he noticed how no consideration was given to the risk that a particular investment poses.

This inspired his article titled “Portfolio Selection”. The paper was first published in the March 1952 Journal of Finance. It did not garner any attention from the financial world and was instead left to collect dusts on library shelves.

The “Portfolio Selection” consisted of four pages of discussion, with the remaining 10 pages dominated by graphs and numerical doodles.

A decade past before the paper was rediscovered.

The interpretations presented by the article influenced the way people thought of portfolio building. They now believe that risks, not the best price, should be the most important consideration when building one’s portfolio. Additionally, investor’s risk tolerance was also established.

Building an Investment Portfolio

When building your portfolio, you should dedicate as much effort as if you’re buying a new car or house. It’s important that you not neglect your homework and do as much research as you can. Identify your needs and goals first before proceeding any further. After this, learn as much as you can about the assets you’re planning to add to your investment portfolio.

Step 01

Remember that before starting with anything, you must first consider your goals. You can list them down on paper or your gadget if you’re afraid you’ll forget them. Just make sure that you have a clear goal in mind before proceeding with the other steps.

Step 02

When determining your risk tolerance, be honest with yourself. Being able to identify your tolerance for risks can greatly help you in building your investment portfolio. Just be brutally honest with yourself. Don’t push yourself through your limit because doing so might not end well for you.

Step 03

Diversify.  Always keep in mind that you have a lot of choices in the financial markets. You don’t have to bind yourself on stocks and/or bonds. There are other asset classes out there that might pique your interest. Just always do your research before settling into investing on that asset class or sub-asset.

Here are 3 Tips to Building Successful Investment Portfolio.

Man studying graphs and data on a pinned on the wall

Managing Your Investment Portfolio

There are important things you should consider if you want to maintain a successful investment portfolio. Being able to do this successfully is a feat that even most seasoned professionals find hard to accomplish. But there are guidelines that can help you in managing your portfolio.

Pointer 01: Avoid getting too attached to any particular asset

You should know and acknowledge when it’s time for you to sell. It can be a considerably harder decision to make compared to buying since you might be invested financially and emotionally.

In order to avoid this, you can develop a set of rules of guidelines you’ll have to adhere to when it comes to making the decision to sell an investment. But to turn this into an effective solution, you need to enforce the rules consistently.

Learn when and how you should rebalance your portfolio.

Pointer 02: Don’t be afraid to use Stop Loss orders

One of the most important factors that you should add to your sell discipline rules should be the implementation of Stop Loss orders. This is the price at which you sell the investment rather than further incur losses. You should consider adding Stop Loss orders on every investment you own.

Pointer 03: Don’t stray away from your plans

You need to remember that implementing your plans the way they were meant to be done can greatly help you as an investor. In order for you to maintain the portfolio at its best condition, you have to follow the plans you made. You should avoid getting swayed to change your plans with every little thing that happens in the market.

Conclusion

Building your own investment portfolio can be the easiest part of owning one. Managing and maintaining one, on the other hand, is a different matter altogether. You need to understand what an investment portfolio is in order for you to be able to create an effective one.

Don’t be afraid to ask questions and do intensive research. Such efforts can earn you better results.

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