In general, investment is an allocation of money with the expectation of some future benefit like investment in real estate, durable goods, factories for manufacturing or R&D. The benefit from the investment is called return. Generally, investors expect higher returns from the riskier investments.
“In investing, what is comfortable is rarely profitable.”- Robert Arnott
An investment portfolio is a collection of assets owned by an individual or an institution. An investor’s portfolio may include real estate, gold etc. but most people prefer securities such as stocks, bonds, mutual funds, exchange-traded funds etc. There are different types of portfolios in which you can invest.
The Asset Classes in Portfolio
Professionals generally say that there are four asset classes, although many claims it to be three or five as well. But regardless of the number, if your portfolio includes all these assets, then it is said to be a balanced portfolio.
But before investing you should be having a good knowledge of the types of portfolios.
There are 5 types of investment portfolios:
(i) The Aggressive Portfolio
Aggressive Portfolio includes the stocks with a high reward/risk proposition and these stocks have high sensitivity to the overall market. Companies in the early stages of growth have an aggressive stock offering and they have a unique value proposition. To build an aggressive portfolio it requires an investor, willing to seek out such companies which may not be having common household names. Technology would be the most common sector to scrutinize, other sectors with an aggressive growth strategy can also be considered. When building an aggressive portfolio risk management becomes most important.
(ii) The Defensive Portfolio
Defensive stock usually does not carry a high beta and are isolated from the movements of the broad market. Cyclical stocks are most sensitive to the economic business cycle. Companies that make daily need products will survive irrespective of the economy. Buying of cyclical stocks will offer extra protection against detrimental events. These are just the basket of stocks recommended by managers based upon the status of the business cycle. The products and services are in constant demand for these companies. Dividends are offered in many of these companies which helps to minimize capital losses.
(iii) The Income Portfolio
Income Portfolio mainly focuses on money making to the stakeholders through dividends and other types of distributions. The income portfolio must generate a positive cash flow. Majority of the profits of these companies are returned back to the stakeholders in exchange for a favourable tax. REIT is a simple way to invest in the real estate avoiding the problems of owning any property. These stocks are however subject to economic climate. An income portfolio is a kind of appreciation to the people’s retirement income.
(iv) The Speculative Portfolio
Speculative Portfolio is like a pure gambling game. It gives huge risk than other. Speculative plays could be IPO’s or stocks that are rumoured to be takeovers. Healthcare or technology firms fall into this category in the process of researching a breakthrough product. These types of investments are captivated as choosing the correct one leads to additional profits. Speculation, to be done successfully, demands a lot of time and research. These stocks are purely traded and not buy & hold investment.
(v) The Hybrid Portfolio
Venturing into other investments like real estate, bonds, commodities, etc is known as the hybrid portfolio. This approach has more flexibility. One may also invest in REITs and MLPs for a balanced portfolio. A mix of stocks & bonds in relatively fixed proportions are included in this portfolio. Diversification across different asset classes are offered in this approach. It is beneficial since fixed income securities and equity may have a negative correlation with one another.
So, as you cannot invest your money everywhere, portfolios can be your financial friends. Every portfolio is made up of different ingredients, it gives you a better possibility where your money can be gambled on. To make it easier, they have been categorized into Asset Classes.
The four classes of assets are generally considered to be:
(i) Stocks or equities
(ii) Fixed Income or bonds
(iii) Money market or cash equivalents
(iv) Real estate or other tangible assets