For an artist, a portfolio is a collection of his paintings. And for an investor, a portfolio is a collection of his investments. You may think that investing and painting have nothing in common. However, the ability to pick the right investments for your portfolio is an art in itself. Here are some things you should keep in mind so that you can create a profitable portfolio:
1) Identify your investment goals
You can create an investment portfolio by simply investing in a bunch of different investments. However, that may not be the ideal way to reach your financial goals. Don’t invest just for the sake of investing. It is important to have a list of goals you wish to achieve. And your portfolio should work towards helping you reach these financial goals.
You need to ask yourself:
a) When do you require money in the future?
b) How much money do you need at the time?
c) How much can you invest right now to achieve those goals?
Identifying the capital amount that you can invest as well as your future goals is the first task of creating a portfolio. From this, you can identify which investment avenues are the best options for you.
When you talk about investments, the first two options you hear are stocks and bonds. Sure, stocks and bonds are popular investment options but they are not the only options. For example, if you invest all your money in stocks, you can risk losing the entire amount in case of a market crash. And by not considering other avenues, you might miss out on the opportunity of getting better gains. Alternative assets like commodities, real estate and gold are viable options too. You need to spread your investments across different assets in order to minimise your losses and maximise your returns.
3) Create a portfolio strategy
When you create a portfolio, it is necessary to have a sound portfolio strategy. There are two strategies commonly used by investors in the market:
a) Active portfolio strategy
b) Passive portfolio strategy
If you have the financial means and the ability to digest the risk, the active portfolio strategy might be suitable for you. Otherwise, it is better to stick with the passive approach.
4) Have a long-term focus
Don’t make hasty investment decisions based on peer pressure or current market trends. Identify your investment goals and stick with your investments. This can steadily help you achieve your goals in the long term. But if your funds don’t perform as per your expectations, it may be necessary to reshuffle the portfolio. There is no point in investing your money in a fund that does not perform well. Your money can be better deployed in a fund that offers higher returns. In such a scenario, you can strategically rebalance your funds.
5) Maintain an optimum number of investments
How many investments should you have in the portfolio? Should it be five, 10 or more? To this question, there is no single correct answer. There is no perfect magic number. Having very few funds can be risky. At the same time, too many funds can be pointless. Many investors assume: more the number of funds, better the diversification. This is not always true. In fact, after a certain point, there can be an overlap in funds. However, experts recommend not more than ten funds for optimum diversification.
To sum up
It is good to maximise the returns of an investment but better to maximise the returns of the entire portfolio. Keep the above points in mind when creating your portfolio to achieve financial success.
Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.