Portfolio Investment


A portfolio investment is an investment strategy that is made with the expectation of earning a return. It is a collection of assets owned by an individual or an institution that may include stocks, bonds, cash, cash equivalents, government bonds, real estate investment trust (REITs), Treasury bills, exchange-traded funds (ETFs), mutual funds, certificates of deposit, and currencies. Moreover, it can also include options, physical investments such as real estate land, timber, and commodities, as well as derivatives such as warrants and futures. This portfolio also refers to a group of investments that an investor uses to earn a profit while making sure that assets or capital are preserved.

Retirement Portfolio Investment Decisions

The biggest reason why people invest is to save money to fund a comfortable retirement. The key to a successful retirement savings strategy is finding the right balance between risks and investment return. Here are a few recommendations that you can follow to ensure that you make wise decisions with your retirement savings.

1. Construct a Total Return Portfolio

This portfolio is designed by a financial adviser to achieve a long-term rate of return, wherein along the way, you follow a prescribed set of withdrawal rate rules that will allow you to take out 4–7 percent per year, and in some years, increase your withdrawal for inflation. The concept of this portfolio is that you are targeting a 10- to 20-year average annual return that meets or exceeds your withdrawal rate. With the previously mentioned concept, it is safe to conclude that you are targeting a long-term average; however, in any one year, your returns will deviate from that average quite a little. For you to follow this investment approach, you have to maintain a diversified allocation regardless of the year-to-year challenges of the portfolio.

This approach is best used by experienced investors—those who enjoy managing their own money and have a history of making disciplined and logical decisions. You can also hire a financial adviser who is familiar and who uses this approach if you are not familiar with it. Take note; a well-created total return portfolio is one of the best retirement investments you can make.

2. Retirement Income Funds

Retirement income funds are a specialized type of mutual fund that automatically allocates your money across a diversified portfolio of bonds and stocks, often by owning a selection of other mutual funds. Having a retirement income fund allows you to retain control of your principal, plus you can access your money at any time.

3. Immediate Annuities

Annuities are not an investment; instead, they are a form of insurance. However, we included this in the list since their purpose is to produce income, which is what you need in retirement. Immediate annuities can be an excellent solution to the following:

  • those who do not have many other sources of guaranteed income;
  • to those who quickly spend a lump sum of money; and
  • to single people with long life expectancy.

4. Buy Bonds

The yield or the interest income that you receive from a bond can be your steady source of retirement income. Moreover, individual bonds can be used to form a bond ladder with maturity dates set to match your future cash flow needs. This investment structure is referred to as time-segmentation or asset-liability matching.

5. Real Estate Investment Trusts (REITs)

A real estate investment trusts are like a mutual fund that owns real estate. REITs may specialize in one type of property, such as hotels, motels, apartment buildings, office buildings, etc. Moreover, REITs can be an appropriate retirement investment when used as part of a diversified portfolio. However, due to the tax characteristics of the income that it generates, this type of investment may be best to hold inside a tax-deferred retirement account such as an IRA.

In addition to the five retirement portfolio investment decisions, you can also consider the following:

  • Variable Annuity With a Lifetime Income Rider;
  • Closed-End Funds;
  • Dividends and Dividend Income Funds;
  • Rental Real Estate; and
  • Keep Safe Investment.

Tips for Diversifying Your Portfolio

Diversification is a management strategy that blends different investments in a single portfolio. The idea behind this strategy is that a variety of investments will yield a higher return, and it also suggests that investors will face a lower risk by investing in different vehicles. The following tips will help you with diversifying your portfolio.

1. Spread the Wealth by Investing in Various Sectors: Do not put all your money in one sector or one stock; instead, consider creating your virtual mutual fund by investing in various companies that you know. You can also invest in exchange-traded funds (ETFs), real estate investment trusts (REITs), and commodities. Think beyond and go global! However, always make sure to keep yourself a portfolio that is manageable.

2. Consider Bond Funds: Consider adding fixed-income funds to your investments. By doing so, you are further hedging your portfolio against uncertainty and market volatility.

3. Keep Building your Portfolio: Dollar-cost averaging is an approach that is used to help smoothen out the peaks and valleys created by market instability. It allows you to invest money regularly into a specified portfolio of securities, thereby allowing you to buy more shares when prices are low and fewer when prices are high.

4. Be Mindful: You have to have a “nose for news” to keep you updated with the changes in the overall market conditions. Investigate the happenings to the companies where you invest your money. By doing so, you will know when to get out and when to sell and move on to your next investment.

5. Be Aware: Always keep an eye on what you are paying and what you are getting for it. Evaluate your fees because some firms charge a monthly fee, while others charge transactional fees.

How to Calculate Expected Portfolio Return

The returns are based on historical data, therefore investors should take into account the likelihood that each security will achieve its historical return given the current investing environment. In order to calculate the expected return of an investment portfolio, the investor should know the expected return of each of the securities and the overall weight of each security in the portfolio. The following is the equation for the expected return of a portfolio that has three securities:

Expected Return=WA×RA+WB×RB+WC×RC

Where:

WA = Weight of security A

RA = Expected return of security A

WB = Weight of security B

RB = Expected return of security B

WC = Weight of security C

RC = Expected return of security C​

Types of Portfolio Investment

There are various types of portfolios that come accordingly to their strategies for investment. Here are some information about three different portfolio types, namely: Growth Portfolio, Income Portfolio, and Value Portfolio.

1. Growth Portfolio – this type of portfolio aims to promote growth by taking greater risks, including making investments in growing industries. Growth portfolios typically offer both higher potential rewards and higher concurrent potential risks. This type of investment focuses on younger companies that have more potential for growth as compared to well-established firms.

2. Income Portfolio – this type of portfolio focuses mainly on securing a regular income from investments as opposed to focusing on potential capital gains.

3. Value Portfolio – under this type of portfolio, an investor takes advantage of buying cheap assets by valuation. In general, value investing focuses mainly on finding bargains in the market.

Steps in Building an Investment Portfolio

1. Plan

The most successful portfolios are created with due planning. They are made based on a firm understanding of the fundamentals of the individual securities that comprise the portfolio. Your portfolio should also factor risk tolerance into balancing the discussion.

2. “Quality over Quantity.”

When you invest, you should always strive for quality. Quantity may sound inviting, but you are expecting long-term results that you are likely to get when you choose quality over quantity.

3. Give it time

Success takes time. There may be some investment choices that you can hold for shorter periods than others, but still, maintaining a long view should deliver positive returns.

4. Concentrate

Staying focused on what you can control is just an individual approach and mindset. There are various things that you cannot control in this field, such as the markets, the political climate, the companies that you’re invested in, etc. For you to keep up, you have to determine your strategy, or you can have a financial adviser that will help you get through.

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