How to Build a Profitable Investment Portfolio?
Every investor wants to achieve such a profitable investment portfolio that generates continued profits without suffering any losses. Is it possible? Yes, it is. With the right approach to asset allocation combined with good research and analysis of the assets and the return potential, any investor can achieve their dream investment portfolio. So, here we will be discussing the steps and tricks to build a profitable investment portfolio.
What is an Investment Portfolio?
Investment portfolio is the collection of assets that the investor has invested in. It is the representation of the types of assets that the investor holds. In addition, it includes the percentage of money invested in each of them. An investment portfolio is a term that has gained so much popularity only in recent times. It has held significant importance for investors since the beginning of the digital investment market. Now that the losses and profits earned by different assets get reflected in one’s investment portfolio, the investors have become largely concerned about maintaining a profitable portfolio.
How to Build a Profitable Investment Portfolio?
Here is a detailed six-step process to start building a profitable investment portfolio.
Calculate Your Risk Appetite
Having knowledge and awareness of one’s risk appetite is extremely important and the first step in building a profitable investment portfolio. It is because risk tolerance helps you in identifying the type of assets that you would like to invest in. The risks and the returns on investments are usually directly proportional to each other. Higher risks correspond to higher returns and vice versa. Therefore, if you are willing to take high risks and invest in such assets, it is determined by your risk appetite.
Diversify Your Assets
Once you have determined your risk appetite, it’s time for you to begin choosing the assets that you would like to invest in. Always diversify your investment money among various assets depending upon their risk and return value.
Determine Your Asset Allocation
The third step is to allocate investment percentage to your chosen types of assets. You must allocate your assets by considering three main factors. These are the expected returns, the risk appetite, and the time period of your investment. Depending upon the value of these factors for the assets, allocate the fraction of your investments to each of them.
Create Your Investment Portfolio
Now, it’s time to divide your capital among the allocated assets. While doing this, you must always consider the security and potential of growth contained within each asset. To obtain a better understanding and view of the asset allocation, you can break the asset classes into subclasses depending upon the risk levels and expected returns.
Assess Your Investment Portfolio
Once you have built your profitable investment portfolio, you should keep reassessing your portfolio to see if it’s actually striving towards meeting your end goals. To do this, compare the proportion of values of each asset to the whole portfolio value. Sometimes, market factors may influence the return potential of assets. At this time, you will need to adjust your portfolio accordingly and reallocate assets, if needed.
Make Changes to Achieve the Desired Profitability
The last step is to sell the degrading assets and buy the underweighted assets with that money. To find out which assets to buy, consider the security and return potential of the assets and choose one of two, depending upon your risk tolerance.
Tips to Build a Profitable Investment Portfolio
In addition to the steps for building a profitable portfolio, you must follow the tips given below to build a nice, diversified, and worthy portfolio.
Set Well-defined Objectives
Setting clear and well-defined objectives for your investments is very crucial for you to know how much you want to invest and why you want to invest. While some people may begin investing money to build their retirement fund, some on the other hand may be investing money to generate passive income or save for a dream home or a world tour. So, it is good for investors to set up clear objectives for them to build a profitable investment portfolio.
Minimize the Expense Ratio
The amount of money that goes into investment fees, brokerage, or any other commission may not seem to be a lot in the beginning. But if you add these small amounts of fees over a long period of time, they can add up to make hundreds and thousands of bucks. Therefore, always lookout for an expense ratio to be less than 1%. If possible, invest in assets having negligible or zero fees in order to build a very profitable investment portfolio.
Utilize Tax-efficient Accounts
There are some investment accounts designed to encourage lower or middle-class people to invest and save money. Such funds give tax benefits to the account holders. However, there can be a penalty tax in case the holder withdraws the money before the maturity date.
Do Not Overpay for an Asset
Sometimes we tend to overpay for assets that might seem to be powerful in terms of yielding returns. However, this is the beauty of the investment market. An asset that may have no real value may show a hike in its prices over the short term. On the other hand, an asset having some real value may decrease in price. Therefore, you must always do your due research while choosing the assets. You should carefully analyze the price to see if it’s actually worth it.
Diversify Your Portfolio
You must never put all your money into a single investment option. While it’s good to invest your money in blue-chip funds, you should never put all your investment money in blue-chip funds. It’s always better to diversify your portfolio among several different types of assets. The assets that you choose should have very little or no correlation amongst themselves. This ensures that if one asset class goes down in value, the other assets in a profitable investment portfolio must go up to balance it.
While building an investment portfolio, the key to earning maximum profits is to choose assets having low to moderate risk potential with moderate to high returns. In addition to this, diversification of the portfolio among various assets, especially gold and silver. It doesn’t only help in achieving a profitable portfolio but also helps in hedging the rough market times.