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Layers and Depths of building Portfolio: Investing Primer


Investment portfolios are buckets that combine different asset classes in order to optimize the risk to reward ratio. Stocks, bonds, ETFs, gold, equity, and debt are typical securities that come to mind when one thinks about investments. Portfolios provide financial stability and independence in the long run, against market volatility.


You could very well invest in individual stocks or be completely vested in the real state. But the risks of having all your funds in one asset category outweigh the returns. Here, portfolios help you make risky (and possibly high-reward) investments while offsetting the risks with low-risk assets like bonds and index funds.


Things to Consider


Building your investment portfolio is a multi-dimensional process that requires understanding your present needs, future financial goals, and risk tolerance. Adaptability and active management are skills pivotal in putting together a successful portfolio.


Asset allocation involves layers and depths that require scrupulous deliberation and balancing of assets to achieve profitable returns that are under our risk appetite.


Let's look at the pivotal points that need to be examined before constructing a dependable portfolio:

1. Monetary Goals - short, medium, and long term


Our financial timelines can be categorized into three broad phases - short, medium, and long-term.


Short-term

There are aspirations that we want to fulfill in the immediate future, such as buying a car, that are right ahead on the timeline.


Long-term

There would be future provident plans that we have concocted for post-retirement. These goals will sit at the near end of our timeline.


Medium-term

And still, some situations will require substantial capital that can be placed on the timeline between the present and future. Goals like marriage, the birth of a child, or buying a house will make up this medium-term phase.


As investors, the portfolios should reflect our personal financial goals; a varied basket of financial instruments - stocks, ETFs, stacks, etc. - will ensure returns corresponding to our goals at the opportune times.


2. Risk Appetite and Loss Tolerance


Risk appetite and loss tolerance are important factors in deciding the rebalancing strategy in asset allocation. With these measures, we can adjust the asset’s weights in a portfolio to always be within our risk limits. You need to recognize the amount of loss you can endure and still stay financially secure and competent.


True diversification across geographical economies and uncorrelated asset classes can lower the net risk in your portfolio. Every investor needs to have a risk profile mapped out over present debts, assets, and future objectives, to guide investments worth picking or selling.


Risk profiles can chiefly be divided into three buckets - conservative, aggressive, and balanced. A person with many liabilities could prefer a conservative approach to investing, while another with considerable capital might take the aggressive or bal