How to Build an Investment Portfolio: Everything You Need To Know

Written By
Julija A.
August 12,2022

When it comes to investing, there are always things to learn. But don't worry, we're here to share some pointers from our own experience! In this guide, we'll teach you everything you need to know about investment portfolios and how to build one that meets your needs. 

We'll start by explaining what an investment portfolio is and how it works. Then we'll move on to different types of portfolios and provide tips for creating a profitable one. Finally, we'll wrap up with a list of factors every investor should be aware of. So, let's get started!

What is an Investment Portfolio?

An investment portfolio is a collection of securities, such as stocks, bonds, and mutual funds, held by an individual or an institution.

The purpose of this portfolio is to provide the investor with a return on investment (ROI), which is the profit or loss that results from investing in a security. The return on investment can be in the form of interest payments, dividends, or capital gains.

To generate a return on investment, the portfolio must be meticulously managed by an experienced financial advisor. The advisor’s role also entails determining the best mix of securities for the portfolio, as well as the appropriate time to buy and sell each security.

By carefully managing an investment portfolio, investors can attain their financial goals. For example, an investor saving for retirement may have a different mix of securities than an investor looking to generate income from their portfolio.

However, all investors should consult with financial advisors before making any decisions about their portfolios.

Types of Investment Portfolios

Investment portfolios come in all shapes and sizes, and there is no one-size-fits-all solution. The type of portfolio that is right for you will depend on your investment goals, risk tolerance, and time horizon. Some common types of investment portfolios include growth portfolios, income portfolios, balanced portfolios, and index portfolios.

Growth Portfolios

While there is no guaranteed return on investment with a growth portfolio, it is typically less risky than other types of portfolios, such as those that focus on generating income.

Many investors choose to build a growth portfolio to achieve long-term financial goals, such as retirement. A retiree's investment portfolio should be diversified so that it can provide a consistent income stream throughout retirement.

Instead of trying to earn income from dividends or interest payments, a growth investor focuses on finding companies that are expected to experience significant increases in their stock prices. The projections are that the stock prices of the companies in a growth portfolio are expected to go up over time, providing the investor with capital gains.

Income Portfolios

An income portfolio is another investment portfolio model designed to generate regular income for the investor. Typically, income portfolios comprise investments that pay dividends or interest, such as stocks, bonds, and real estate.

The purpose of an income portfolio is to provide the investor with a steady stream of income that can be used to cover living expenses or other financial obligations.

However, because they typically offer lower returns than growth-oriented portfolios, income portfolios are not suitable for everyone. Before investing in an income portfolio, you should consider your specific goals and needs carefully.

Balanced Portfolios

A balanced investment portfolio is an investment strategy that seeks to achieve stability by investing in a mix of assets, including stocks, bonds, cash, and real estate. The objective is to protect oneself against losses in any one asset class while still providing some degree of growth potential.

For example, if the stock market were to tank, a well-balanced portfolio would still have the potential to generate returns from other asset classes. While there is no guarantee that a balanced portfolio will outperform the market in any given year, it has proven to be a successful strategy for most investors in the long run.

When creating an investment portfolio, it is important to assess your goals, risk tolerance, and time frame. With these factors in mind, you can select the right mix of investment assets that will help you meet your financial objectives.

Index Portfolios

Index portfolios are a type of investment vehicle designed to track the performance of a particular stock market index. The most common index tracked by these portfolios is the S&P 500, which consists of the 500 largest publicly traded companies in the United States.

A number of advantages, including diversification, transparency, and low cost characterize this type of portfolio. Additionally, index portfolios are often perceived as a more passive investment strategy, as they do not require active investment management to achieve their desired results.

Consequently, index portfolios have become increasingly popular in recent years, particularly among investors looking for a simple and cost-effective way to gain exposure to the stock market.

How to Create an Investment Portfolio: Tips for Beginners

When it comes to investing, there's no one-size-fits-all approach. It’s your individual circumstances, goals, and risk tolerance that will ultimately determine what the best way to grow your wealth is.

However, some basic principles apply to every portfolio. We'll share four tips on how to create a portfolio that meets your needs.

Set Your Goals

The first step is to decide what you want to achieve with your investments. Do you intend to generate income, build capital, or preserve your wealth? Once you know your goal, you can select the right investment mix to help you achieve it. For example, if you're looking for income, a portfolio of bonds is likely to be more suitable than a portfolio of shares.

Choose the Type of Portfolio

The second step in your investment portfolio strategy is to choose the right mix of assets. A healthy portfolio will typically include a combination of shares, bonds, property, and cash. The key is to spread your investment risk across asset classes so that you're not too exposed to any one type of investment risk.

Diversify Your Portfolio

The third step is selecting the investments that will make up your portfolio. This is where things can get tricky, as there are thousands of options to choose from. One approach is to rely on a professional fund manager who can select the investments for you. 

Another option is to research the market and choose your own stocks and funds. Whichever approach you take, make sure to diversify your investment portfolio and keep an eye on the costs.

Review and Update Your Portfolio Regularly

Finally, remember that your portfolio is not set in stone. As your circumstances change over time, so should your investment mix. Regular reviews will help you stay on track and make sure your portfolio continues to meet your needs.

Portfolio management is a vital part of successful investing. By following these tips, you can ensure that your portfolio is well-adapted to your requirements and will help you achieve your financial goals.

Things To Keep in Mind When Building a Portfolio

When building a portfolio, you should take several factors into consideration. Here are some of the crucial aspects every investor should be aware of:

  • Risk tolerance: How much risk are you willing to take on? This will determine the types of investments you include in your portfolio. A high risk tolerance indicates you're more likely to invest in volatile assets like shares, while a low risk tolerance means you should stick to safer investments like bonds.

  • Time horizon: When do you need the money? This will affect your choice of investments and whether you're willing to take on more risk in exchange for higher returns.

  • Investment goals: What would you like to achieve with your investment portfolio? Are you looking to generate income, build capital, or preserve your wealth?

  • Portfolio asset allocation: How should you allocate your assets across different asset classes? A diversified portfolio will typically include a mix of shares, bonds, property, and cash. And with appropriate asset allocation, your portfolio can go a long way and bring you the desired results.

  • Additional costs: Be sure to keep track of the fees you're paying, and remember that high costs can eat into your returns. And if you're using a professional fund manager, make sure you know what you're paying in fees.

These are just some of the things you should think of when building your investment portfolio. By taking the time to assess your circumstances, you can put together a portfolio that fully meets your needs.

Bottom Line

An investment portfolio is a collection of assets you have invested in to earn returns. Building a portfolio can be a great way to save up for retirement or other long-term financial goals. 

As there are many different types of portfolios, it’s essential to understand your options and how each one works before investing. Also, if you're not sure where to start, you can always consult with a financial advisor to get a clearer picture of what would work best for you.


What Does a Good Portfolio Look Like?


A good, diverse investment portfolio typically contains a mix of asset types tailored to your financial goals and risk tolerance. For example, many financial experts consider a 60/40 portfolio a good starting point. This portfolio would contain 60% stocks and 40% bonds or some alternative investments.

What Is a Realistic Investment Return?


This answer will vary depending on various elements and circumstances. However, a good rule of thumb is to expect a 5%-7% return. While 5% is considered a good return, 7% is an excellent ratio.

What Is the Safest Investment With the Highest Return?


There is no such thing as a "safe" investment with a guaranteed high return. As all investments come with some degree of risk, the returns you receive will depend on how much risk you are willing to take on.

That said, you should keep in mind that one investment portfolio can be less risky than another. For example, high-yield savings accounts, money market funds, or corporate bonds are considered safer investments.

About author

Albert Einstein is said to have identified compound interest as mankind’s greatest invention. That story’s probably apocryphal, but it conveys a deep truth about the power of fiscal policy to change the world along with our daily lives. Civilization became possible only when Sumerians of the Bronze Age invented money. Today, economic issues influence every aspect of daily life. My job at Fortunly is an opportunity to analyze government policies and banking practices, sharing the results of my research in articles that can help you make better, smarter decisions for yourself and your family.

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