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What Does the Ideal Investment Portfolio Look Like?

Where do you begin? That’s the quintessential question one must ask when setting up an investment portfolio. Truth be told, expert opinions vary wildly on this topic. It depends on the individual. The more pertinent question is the following: What is your appetite for risk? Once you have answered this question, you can move on to a series of other important questions such as what is the purpose of setting up an investment portfolio? How long do you have until retirement? How much money do you have for investment purposes?

Broadly speaking, there are 4 major investment categories: Stocks, Foreign exchange, Indices, and Commodities. Stocks/equities are self-explanatory – they include Google (GOOG), Facebook (FB), Walmart (WMT), Goldman Sachs (GS), and hundreds of other listed stocks. In fact, the amount of stocks available for investment purposes overshadows commodities, indices, and Forex pairs. If your investment preference is commodities, popular options such as gold, silver, copper, WTI crude oil, and Brent crude oil abound. Many commodities are traded in futures contracts, or as CFDs (contracts for difference).

Other investment options such as indices include investing in the general performance of global bourses such as the NYSE, Dow Jones, NASDAQ, CAC40, DAX 30, FTSE 100 index, Nikkei 225, and others. Indices include multiple listings of stocks. And then, there are currency pairs such as the GBP/USD, USD/CAD, GBP/ZAR, USD/CHF, and others.

Lesser-known categories for financial portfolios include derivative trading instruments (CFDs), cryptocurrencies (Bitcoin, Ethereum, Litecoin, Dash and others), and Treasuries (5-year treasury notes, 10-year treasury notes). Your risk preference plays a big part in how you invest your funds. If you’re risk-averse, you are unlikely to part with hard-earned money on highly risky investments such as Forex pairs and stocks. If you are risk seeking, you’re more likely to opt for high risk, high growth investment strategies such as tech stocks, or investments in emerging market economies. Your risk profile is a good starting point for determining the type of investments you’re likely to pursue.

Different Types of Funds for Investments

Stocks are the umbrella term given to a wide range of equities investments. These include Exchange Traded Funds, mutual funds, indexed funds and so forth. Each of these investment options gives you choices. For example, you can invest in gold through an ETF such as SPDR. It has the world’s largest asset allocation of gold at $36.3 billion, but there are several other gold ETFs available. SPDR Gold Trust has a 52-week price performance of 7.53%, with a net expense ratio of 0.40%.

There are multiple reasons to include gold as part of your investment portfolio. For starters, gold is a commodity which you can physically invest in and hold in the form of gold coin or gold bullion. Plus, gold is also available in the form of stocks and exchange traded funds with companies like Goldcorp., Royal Gold Inc., Franco-Nevada Corporation, Barrick Gold, and the like.

When markets become volatile, gold is considered a hedge investment. If money is no longer flowing into stocks, it is being channeled elsewhere – notably treasuries and gold. Demand for gold is inversely related to the strength of the USD. When the USD appreciates relative to other currencies, the price of gold becomes more expensive. However, the demand for gold begins to decline.

Why? Because gold is a dollar-denominated asset, and this means that demand for it will decrease when other currencies are weaker relative to the USD. Now that the USD has been subjected to an interest rate hike, demand for dollar-denominated assets is also likely to decrease somewhat. Equities tend to sour with rate hikes, and we have seen somewhat of a selloff taking place on Wall Street since the Wednesday, 21 March 2018 rate hike.

How Should You Build Your Financial Portfolio?

There are many factors to consider when building a financial portfolio. Foremost among these is your investment timeframe. If you are the type of investor who has a rather short-term perspective for building up a portfolio, long-term appreciation is out of the question. Your best bet for maximum gain is high-risk, high reward short-term stocks. These are typically technology stocks such as Facebook, Twitter, Netflix, and company. Volatility is a reference to dispersion around the mean – the greater the volatility, the higher the price fluctuations around that benchmark.

Investment Strategy Approach: If you are a low risk, long-term investor, you may wish to consider stable stocks such as big-name brand companies like General Electric, Comcast, Disney, Walmart, and the like. Security is never assured in the financial markets, except if you have treasuries and certificates of deposit which are insured by the federal government. Other than that, there are varying degrees of risk associated with building a financial portfolio. Nowadays, alternative investments are being added into financial portfolios. This new asset allocation includes a combination of 10 top-performing assets – quality over quantity. Technical and fundamental analysis is essential when choosing your asset allocation. These are indispensable components of the process of picking stocks.

 

How Often Should You Invest in Your Portfolio?

Investors should allocate a monthly allowance to building up their financial portfolio. A fantastic way to do this is dollar/cost averaging. You simply invest a fixed amount in your preferred selection of assets every month. Over time, you will get an average allocation of funds rather than a lump sum investment in a stock, index, currency pair, or commodity. The long-term formula for getting the best price with financial instruments is by making these monthly investments. Your risk profile and investment horizon must be factored into the equation too.

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