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The term ‘portfolio’ is widely used in the global financial market, with this describing a broad collection of financial investments such as bonds, commodities, stocks and cash equivalents.
In truth, there are no hard or fast rules in terms of how portfolios are constructed and managed, as they can also compromise traditional and corporeal assets like real estate, art and contemporary investments such as non-fungible tokens (NFTs).
In this post, we’ll strive to understand investment portfolios further while asking how you can build a successful and profitable portfolio for the long term.
Understanding Portfolios Further
When considering investment portfolios further, it’s essential to understand the core concept of diversification.
In simple terms, this means spreading your capital across a broad range of assets and not putting your eggs into a single basket in a bid to minimise exposure to a single asset class and reduce risk in the process.
In this respect, you must build your own portfolio based on your unique understanding and appreciation of risk, whether you’re cautious and risk-averse in your outlook or like to embrace risk in the pursuit of higher returns.
This way, you can construct a bespoke portfolio that recognises and tolerates pertinent risks while mitigating this as effectively as possible without overly compromising on your projected profitability.
Similarly, the precise way in which you diversify is completely up to you, as you look to distribute fixed amounts of your capital across a select number of asset classes.
In general terms, the common structure of a risk-averse portfolio may comprise 40% stocks and 60% bonds, the latter of which are fixed-income products that the government may issue and capable of delivering reliable and incremental returns over time
Younger or slightly more risk-hungry investors may switch this ratio to 60/40 in favour of stocks, which are slightly more volatile but capable of delivering a significantly higher return.
How to Build a Profitable Portfolio for the Long-term
Ultimately, it’s up to you to create a portfolio that can deliver sustainable profits in the longer term. First, however, we’ve put together some tips to help get you on your way:
- Avoid Over-Diversification: Let’s start with the basics, as while diversification is key to every successful portfolio, it is possible to over-diversify your selection of assets. Make no mistake; this can minimise returns significantly over an extended period, so you’ll need to be wary when rebalancing your portfolio and ensure that you swap out assets rather than simply incorporating new ones.
- Consider the Role of Wealth Managers: If you’re relatively new to the financial markets and unsure of how to proceed, you should consider leveraging the expertise of wealth managers. Such individuals will help you construct and oversee a selection of assets and funds, helping you make informed decisions that lead to incremental profits over an extended period of time.
Understand Your Goals and Objectives: On a final note, it’s important to return to your investment’s personalised nature and portfolio. Because of this, you must have a keen understanding of your risk profile and underlying financial goals to build a viable portfolio while also leveraging determinism to make more informed choices.
You may also like: 5 Savvy Ways to Diversify Your Investment Portfolio
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