Based on a large number of inquiries to the question: “Which Type of Portfolio Might a Young Investor Who Is Not Afraid of Risk Choose?” we decided to prepare a comprehensive article that will help you in building a portfolio. Read on and don’t forget to give us feedback in the comments!
Table of content – Which Type of Portfolio Might a Young Investor Who Is Not Afraid of Risk Choose?
Retail investment is growing in popularity every year. However, not all investors take a professional approach to the process. More often than not, individuals make spot investments, trying out certain instruments, as they lack proper training and financial knowledge. In reality, however, you need to define your investment objectives, compile your investment portfolio and then monitor how much return it brings you.
The basics about portfolios
Naturally, any investor – whether a beginner or an experienced one – wants to earn income without risking anything. Unfortunately, the very nature of the market makes that impossible. You always have to choose between reliability and profitability. But there is a way to increase the potential return on investment, while minimizing the risk of losing everything. It’s about building an optimal investment portfolio.
A smart allocation of capital between several assets increases the security of an investment. It’s easy to see how. If one investment turns out to be unprofitable, there are other, more stable investments, because it is very rare for all projects to fail at the same time. At the same time, when funds are invested in several instruments, the best conditions for profit growth are created. By analyzing the profitability of your investment portfolio, you can promptly redistribute your capital – sell unprofitable assets and use the proceeds to purchase more profitable ones. The latter is only true, of course, if the liquidity of the investment is high.
The main objectives for building a portfolio
Thus, we can identify two main objectives for building an investment portfolio:
- Risk diversification (remember the famous English proverb about not putting all your eggs in one basket);
- Increasing returns by redistributing capital.
The objectives are now clear, but how do you build an investment portfolio? First, let’s find out what types of assets can be included.
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These are securities whose owner is entitled to a share of the profits of the issuing company or a share of its assets (in the event of bankruptcy). Shares can be used to earn dividends (actually a percentage of the company’s income), or they can be traded. This is the type of income that is most often preferred by experienced investors. Shares are highly profitable but risky instruments. Successful trading of these securities can yield large profits, but if unsuccessful, you can lose a considerable amount of money.
For the information
Investment portfolios typically comprise stocks of companies operating in different industries, preferably as far apart from each other as possible. The purpose of this approach is to increase diversification. There are different ways that industries are hit by crises – some more than others. If one company falls on hard times and the stock price falls, securities of other issuers will make up for the losses.
Bonds are a kind of ‘debenture’ which guarantees that the issuer will pay back the value of the securities with interest to the owner within a certain period of time. Companies issue bonds in order to raise funds for business development. In other words, it is like they are borrowing money from the holders of the securities. The role of the issuer can be taken not only by commercial enterprises, but also by the government itself. The purpose of issuing bonds in this case is to supplement the budget.
Bonds are a safe but not the most profitable asset. Generally speaking, profitability and risk depend on the issuer. The safest are federal bonds: When you entrust money to the government, you can usually count on getting it back. Yields on these securities, however, are very low. Corporate bonds issued by large companies are also quite safe, with a slightly higher interest rate.
Like stocks, futures are a highly profitable but risky asset. It is not the securities themselves, but a contract to buy them on a fixed date. The purchase price is fixed in advance. So, if by the time of contract execution, the market value of stock goes up, the buyer wins, if it goes down – he loses. In addition to futures, there are options – they do not impose an obligation, but a right to buy/sell a financial instrument.
Gold, silver, platinum, palladium are always valuable and therefore can also be used as an investment. It is also a highly liquid asset that can be sold at any time. There are several ways to invest in precious metals. For example, you can either buy bullion bars, which will have to be paid for, or get an unallocated bullion account at a bank. Investments in precious metals are reliable, but not profitable: there is no direct income to their owner. Such an investment can be seen as a way to preserve capital, but not to multiply it.
Real estate, whether residential or commercial, is also a legitimate type of portfolio investment. Buying a flat or office space to rent out can be a source of passive income. The downside of real estate as an asset is its high cost and low liquidity.
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One of the mega popular components of the modern trader’s portfolio is cryptocurrency. This is where we’ll stay and go through the intricacies of crypto and its role in a trading portfolio.
What is a cryptocurrency portfolio – this is the question every novice trader is asking. The answer is quite simple.
It is essentially a collection of digital assets that a trader owns. Where he keeps them does not matter. If there is more than 1 asset in a trading exchange account or cryptocurrency wallet, it is already considered a portfolio. For investments to be profitable, you need to analyze the projects competently. Proper preparation before buying is the key to profits and less risk.
The market for digital instruments evolves every year. New types of virtual assets are emerging. Key instruments in 2022:
- Digital coins
- DeFi tokens.
For the information
It is recommended to add different types of assets to the cryptocurrency portfolio. This makes it more balanced.
Coins serve as a medium of exchange, unit of payment and investment instrument. Coins are based on their own decentralized system, the blockchain. Coins have value and can be used to buy goods. They essentially act as money. Coins can be issued through mining or stacking. Cryptographic encryption methods ensure the security of the coins.
Units of account are similar to tokens at an amusement park or a certificate to a beauty salon. Assets are created from an existing ecosystem and only grant rights within it. For example, tokens are used to obtain services or reduce fees. They can be bought, sold or exchanged.
While coins are no different from each other, non-interchangeable tokens are unique units. With NFT, the user confirms ownership of digital objects. These can include:
- Art objects.
- Artifacts from games.
- Digital real estate.
NFTs register copyrights through a smart contract system. As of December 2021, most of the non-interchangeable tokens are launched on the Ethereum blockchain.
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Cryptocurrencies are highly volatile – the price is determined by supply and demand. Unlike traditional instruments, digital coins are not backed by fiat money, precious metals or commodities. However, a type of cryptocurrency such as staplecoins is subject to less volatility due to the linkage to real money and commodities. The well-known asset Tether (USDT) is backed by US dollars. This bundle generates less volatility and an exchange rate ratio close to 1:1.
Decentralised finance performs the functions of traditional banks, but on blockchain. Through DeFi, loans and credit are available. The decentralised sector is managed by smart contracts. DeFi-coin Uniswap (UNI), issued by the exchange of the same name, is popular in 2021.
Criteria for choosing cryptocurrencies for an investment portfolio
It is believed that it is better to own 10 strong coins than 100 small coins. Determine digital assets to include in a crypto portfolio by knowing:
- Capitalisation and liquidity.
- The project team and roadmap.
- The support of the community.
Managing an investment portfolio: Profitability and risk
The profitability and risk of an investment portfolio depend on the predominant assets in its structure. The more high-yield instruments one has, the greater the potential profit one can expect, but on the other hand, the larger the amount one is at risk of losing if one fails. Three types of investment portfolios can be distinguished according to their risk/return ratio.
- Conservative. In its structure, the proportion of safe investments is the highest and risky investments the lowest (the classic ratio is 80:20). This type of portfolio is also referred to as a protective portfolio because the main function of such investments is to preserve capital even in the event of adverse developments. Definition: Conservative Investing
- Aggressive. The exact opposite of the type described above. The ratio of safe to risky assets can be as high as 50:50. The expected returns of an aggressive investment portfolio are very high, but if the stock fails, the investor runs the risk of going into negative territory. Definition: Aggressive Investing
- Mixed. This type of portfolio is a happy medium – its asset mix is perfectly balanced at around 70:30. Well-managed mixed portfolios can reduce risks to a minimum and increase expected returns to quite acceptable levels.
Of course, creating a financial investment portfolio is just the beginning. For assets to be profitable, they need to be managed well: to work on increasing returns and reducing risks. To do this, you need to constantly monitor the market behavior of financial instruments and react quickly to any changes. The methods of managing an investment portfolio depend on its type: for example, with an aggressive investment strategy, the greatest attention is paid to risk control, while with a conservative strategy – to methods of increasing returns.
Rules for assembling an investment portfolio
You can build a portfolio on your own or with the help of a more experienced analyst. Some traders choose digital assets based on expert forecasts or even copy the actions of successful investors. The risk of trading is never eliminated. To build a portfolio on your own, you need to follow simple rules:
- Determine your investment objective.
- Select assets that match the plan.
- Assess the risk factor.
- Determine the ratio of assets in the portfolio.
- Choose a tracker to build a portfolio.
- Purchase trading tools.
- Track the movements of the charts.
- Make timely adjustments.
Now let’s talk about the mistakes a trader can make. It is advisable to follow simple rules so that the new experience does not become unfortunate for the trader:
- Diversify your investment instruments.
- Include no more than 10 instruments in the portfolio.
- Invest an amount you are not afraid to lose.
- Make trades based on calculations, not emotions.
- Follow a strategy.
- Analyze companies independently.
- Do not use margin or futures trading unless you have experience.
We have sorted out basic information about trading instruments, types of portfolios and a list of mistakes a trader can make. But now you need to decide what kind of trader you are or want to be. So, here we go!
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Intraday traders are a generalized type of traders who have in common the principle to make all trades within one trading day. To make more profits and compensate for possible losses intraday traders usually open several positions at once. Even losing positions will have to be closed at the end of the day, and a couple of successful trades will allow you to cover your losses and come out with a profit.
Scalpers are a subset of intraday traders who trade in very short time frames, ranging from a few seconds to a few minutes. The scalper’s approach is to quickly take a small profit and repeat the procedure many times in one trading session.
One of the significant limitations of scalping is trading platform commissions. Scalpers benefit from multiple trades with small profits, which means the commission for each trade will accumulate quickly and may noticeably affect the profitability of the trading day.
Position traders trade the trend in a large time frame and are not distracted by small short-term fluctuations in price. It is very much like investing. Position traders are interested in the long term trend, which can last for months. It does not matter whether the price is going up or down, you can make money in both cases.
Position traders hold positions for a long time. You will need patience and a decent deposit to withstand the possible price swings. Besides, it is important for a position trader to be well versed in the assets he or she trades.
Swing traders play on short-term price movements during a long-term trend. When the price of an asset has been rising for several weeks, a swing trader waits for a wave of trades against the uptrend. In a strong uptrend, such trades briefly reduce the price of the asset, but the rise is likely to continue, which means it’s a good time to buy cheaper.
Arbitrage traders play on the difference in the price of an asset on different markets. They are not much interested in technical and fundamental analysis, signals and other macroeconomics. Instead, it is important for an arbitrage trader to know the price of an asset in several markets and understand whether or not it will change over the course of a trade.
The success of arbitrage trades depends on the speed of order processing, commissions and relative calmness in the market – the absence of sharp price fluctuations.
Robotraders use special algorithmic systems to make trades. The master of robot forms a special program – strategy, which robot will follow on the market. Such automation gives advantages like very quick reaction to market movements and ability to make complex calculations. In addition, the robot is not distracted from its work and does not experience emotions that can prevent a human from sticking to the chosen strategy.
And a few words in conclusion to our article
A beginner trader can always count on the help of his or her broker. Many companies offer their clients personal consultants and analysts with whom they can consult on a particular decision. It is important to understand that the full responsibility for the outcome of the trade lies on the shoulders of the trader, so you should always try to understand the specifics of the asset selected for trading independently, and use the services of consultant or the broker’s analytics only to confirm the correctness of the decision taken.
One of the main problems faced by the novice investor is a lack of information to analyze. A broker or specialized services can also help. Some of them are paid, but most can be used for free. It is important to find a place that has all the information you need to make a trading decision.
Investment portfolio – stocks and other tangible assets chosen by the trader to achieve the set financial goals. Correct portfolio formation and effective trading strategy will help to multiply capital in a relatively short period of time. It is important to study objects of investment as much as possible before investing and not to give in to emotions in the process of trading.
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