Stock investors continue to hear about the wisdom of diversification. This just means don’t put all your eggs in one basket. Diversification helps reduce risk and usually leads to better returns on investment.
In other words, there are many ways to achieve diversification. What you choose to do is up to you. Your future goals, your risk appetite and your personality are all influencing factors.
- Aggressive investment portfolios will take huge risks in order to seek handsome returns.
- The defensive investment portfolio focuses on consumer staples that are not affected by the economic downturn.
- The income mix focuses on shareholder distribution.
- Speculative portfolios are not for the faint-hearted.
- The hybrid investment portfolio is diversified across asset classes.
Below are five broad types of portfolios and some tips on how to start using each portfolio. One of them, or a combination of more, will definitely meet your needs.
5 popular portfolio types
Aggressive investment portfolios seek out excess returns and accept the excess risks that come with it.
The stocks in this portfolio usually have a high beta or sensitivity to the overall market. Compared with the overall market, the price of high beta stocks is more volatile. If the beta of a stock is 2.0, its volatility in either direction is usually twice that of the overall market.
Active investors look for companies that are in the early stages of growth and have unique value propositions. Most of them are not household names yet.
Seek rapid growth
Look for companies whose earnings growth has accelerated rapidly but have not yet been discovered by ordinary investors. They are most commonly found in technology, but can also be found in other industries.
When building and maintaining an active investment portfolio, risk management is critical. Keeping losses to a minimum and making profits is the key to the success of this type of investment.
Defensive stocks usually do not have a high beta.They are relatively isolated from broad market trends.
Unlike cyclical stocks that are sensitive to basic economic business cycles, defensive stocks perform well in both adversity and prosperity. No matter how bad the economy as a whole is, companies that produce daily necessities will still survive.
Looking for consumer necessities
Think about the necessities of your daily life and find a company that produces these consumer necessities.
As a reward, many of these companies also offer dividends, which help minimize capital losses. A defensive investment portfolio is a prudent choice for most investors.
The income portfolio focuses on investments that profit from dividends or other types of distribution to stakeholders.
Some stocks in the income portfolio may also be suitable for defensive investment portfolios, but they are chosen here mainly because of their high yields.
The income mix should generate positive cash flow. Real estate investment trusts (REITs) and master limited partnerships (MLPs) are examples of income-generating investments. These companies return most of their profits to shareholders in exchange for preferential tax treatment. In particular, REITs are a way to invest in real estate without worrying about owning real estate.
But keep in mind that these stocks are also affected by the economic environment. REITs were hit during the economic downturn, and new construction and procurement dried up.
Looking for high dividends
Investors should pay attention to stocks that have fallen out of favor but still maintain a high dividend policy. These companies can supplement income and provide capital gains. Utilities and other slow-growing industries are ideal places to start searching.
The income portfolio can well complement the investor’s salary or retirement income.
Among these options, the speculative combination is closest to gambling. It needs to assume greater risks than any of the other risks discussed here.
Speculation may include initial public offerings (IPOs) or stocks rumored to be acquisition targets. Technology or healthcare companies that are developing a single breakthrough product will fall into this category. A young oil company that is about to release its preliminary production results will be speculative.
Financial advisers usually recommend that no more than 10% of personal assets be used to fund speculative investment portfolios.
The popularity of leveraged exchange-traded funds (ETFs) in today’s market can be said to be speculative.ofThey are attractive investments, because choosing the right investment can bring huge profits in a short period of time.
If it is to be successfully completed, the speculative portfolio is the one option that requires the most research. This also requires a lot of work. Speculative stocks are usually traded, rather than a typical buy and hold investment.
Building a hybrid investment portfolio requires venturing into other investment areas, such as bonds, commodities, real estate and even art. The hybrid portfolio approach has great flexibility.
Mix it up
Traditionally, this type of investment portfolio will include core blue chip stocks and some high-level government or corporate bonds. REIT and MLP may also constitute part of assets.
The mixed portfolio will mix stocks and bonds in a relatively fixed ratio. This approach provides diversification across multiple asset classes. This is beneficial in itself, because stocks and fixed-income securities have historically tended to be negatively correlated with each other.
In the final analysis, investors should consider all these portfolios and decide on the right one, or better, the right combination of more than one.
Building a portfolio requires more effort than passive index investment methods. If you act alone, you will have to monitor your portfolio and rebalance it more frequently. Too much or too little exposure to any portfolio type brings additional risks.
Despite the extra effort required, defining and building a portfolio can increase your investment confidence and allow you to control your financial situation.