The economic recovery after the pandemic has encouraged many new investors to step into the market. But, creating and managing an investment portfolio is a demanding task. The investment you may make depends on several factors, such as your risk tolerance, principal invested, rate of return, prevailing market conditions, and more. Here is an easy investment portfolio guide for you.
Along with this, you need to learn about the different types of investments and build a portfolio that helps in minimizing risks and maximizing returns.
The thought behind creating a portfolio is generally simple, i.e., use your money to make money. Even so, it doesn’t matter whether you are a long-term investor or just a beginner. There are a few rules that you need to follow to manage a profitable investment portfolio.
Evaluate Your Risk Tolerance
There is no investment that is totally risk-free. Even keeping the cash holds the risk of inflation, which lowers the purchasing power of consumers. Technically speaking, the risk is the degree of financial loss you can bear in an investment. Therefore, before you take any financial decision, it is important to determine and evaluate your risk tolerance.
Yes, risk and returns indeed go hand-in-hand. The higher risk you are willing to take, the higher returns you can expect. But, it does not mean that you should make any reckless decisions, especially without evaluating your risk-taking abilities. You can consider the following factors for determining your risk tolerance:
- Your “capacity” to take risks. It is often determined by current credit score, loan, income, and possible liabilities.
- Your “need” to take risks. It depends on your financial goals and the rate of return required.
- Your “willingness” to take risks. Unlike the above two factors, it is not quantifiable. Instead, it is based on your comfort level.
- For “how long” you are willing to take risks is another crucial factor. In simple terms, if the investment is for the short-term, the risk tolerance is low and vice versa.
Investment Diversification Is Important
You might have heard the phrase, “Don’t put all your eggs in one basket.” Whether long-term or new, you must keep this phrase in mind as an investor. To be more specific, whenever you take any financial risk, tailor your investment options to build a portfolio that can withstand the uncertainties.
By doing so, you will be able to overcome the loss of one investment with the profits of another. It further provides you the opportunity to minimize the risk as much as possible.
However, understanding different options available and diversifying them is easier said than done. It requires immense knowledge about market conditions as well as the ability to forecast future trends as accurately as possible.
If you are a newbie investor or simply confused by diversification, taking the help of professional advisors would come in handy. They can provide you with different wealth management solutions aligned with your risk tolerance and time frame to reach your goals. They can also help formulate active and passive strategies for growth in your finances.
Don’t Simply Invest And Wait
Many newbie investors with long-term financial goals invest their finances and wait for “market magic to happen.” Yes, patience is one of the key ingredients of wise investment, but it is not the only ingredient.
Instead of waiting, you need to evaluate the performance of your portfolio. It will help you know which investment is doing great and where you need to make changes. If the performance is not as expected, you’ll have to identify the reason for underperformance and take remedial measures. As a result, you will accomplish your financial goals.
Asking the following questions can help you take the next step:
- Are external factors such as economic slowdown the cause behind poor performance?
- Is the halt temporary or short-term?
- Is it the right time to withdraw from the market?
Apart from this, your financial advisors can also help you analyse and track the performance of your finances.
Note: If the halt or underperformance is temporary, do not remove your investment. Otherwise, you might not get the results you expected. Even while you are waiting, keep an eye on the fluctuating market conditions.
To Sum It All Up
These are some ways in which you can build and maintain a profitable investment portfolio. Nevertheless, it is critical to pay attention to the frequently fluctuating market to keep the finances growing while minimizing the risk.
In addition to this, seeking help from financial advisors is also important. They can guide you with the right financial strategy. It becomes particularly important if you are a newbie with lower risk tolerance.