Investment Portfolio

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What is an investment portfolio?

Investment Portfolio - a set of financial and real assets that the investor selects in various proportions in order to maximize profit or diversify risks. The number and composition of assets that go into an investment portfolio depend on the experience and interests investor.

For example, a portfolio may contain high-yield and risky instruments or, on the contrary, instruments, transactions on which will bring less profit, but will be more reliable.

More often than not investment portfolio - is a manager's tool that works with client funds. Depending on the chosen strategy and the desired timing of profits, certain instruments will be included in the investment portfolio.

What types of investment portfolios are there?

There are many different types of investment portfolios; they can be distinguished according to various criteria, but the main types of investment portfolios differ in the type of risk/profit ratio:

Conservative

A conservative investment portfolio consists of government securities, stocks "blue chipsgold and provides high protection of the components and the portfolio as a whole, and the profitability of the investment portfolio is maintained at the required level of the investor.

Moderate

Optimization by yield and risk is a characteristic of a moderate investment portfolio. Such a portfolio contains both high-yield securities with a high degree of risk and low-yield reliable securities, such as government bonds.

Aggressive

Aggressive investment portfolio is staffed with high-yield securities, including their derivatives. These securities have a fairly high degree of risk. Therefore, the investor actively manages his portfolio himself or is in constant contact with the broker managing his portfolio.

How to create an investment portfolio?

The formation of an investment portfolio can be divided into several main stages:

Defining yourself as an investor: conservative, moderate or aggressive investor;
Determination of investment objectives: maximum return, minimum risk, rapid growth of capital, quick return on investment or a combination of these objectives;
Analysis of financial markets based on the goals of investment;
Selection of assets for investment and determining their ratio for a given level of return and a minimum degree of risk;
Acquisition of assets and the beginning of the current monitoring of the formed portfolio.

How to manage an investment portfolio?

Portfolio investments can be managed directly by the investor or transferred to a brokerage company for trust management. Transfer to trust management does not mean full transfer of rights to manage the portfolio. Changes in the composition of the portfolio, an increase or decrease in the value of the portfolio assets take place with the obligatory approval of the investor.

The essence of portfolio management for the investor is to maintain its profitability at a certain level. There are two main approaches here:

Formation of a highly diversified portfolio with a given level of income/risk ratio.
Formation of a high-yield portfolio with a high level of risk.

In this case, the management of the investment portfolio can be of two types:

Active management

Here we are talking about constant monitoring of the market, buying and promptly selling those assets that are losing their liquidity. In this type of management, the composition of the investment portfolio often undergoes changes.

Passive control

This implies the collection of a quality diversified portfolio, its preservation and profit.

What is the return on the investment portfolio?

The main parameters when forming and managing an investment portfolio are its expected profitability and risk. Due to the lack of possibility to determine the dynamics of the above-mentioned parameters accurately, these values are evaluated primarily on the basis of statistical information for previous periods of time.

The expected return on the portfolio is calculated based on the expected return on the assets contained in it

What are the risks of portfolio investment?

An investor should clearly understand that risk and return of an investment portfolio are links of the same chain. A potential increase in profitability entails an increase in risk, and vice versa.

Risks can be determined by factors beyond the control of the investor at the time of selection of investment objects. Such risks relate to changes in the situation in foreign economic activity, they are commonly referred to as systematic.

Systematic risks are divided into:

Political risk - the threat of a negative impact on the market due to a change of government, war, etc;
environmental risk of the investment portfolio implies possible losses in case of natural disasters or deterioration of the environmental situation;
Inflation risk arises in the event of high Inflationwhich will depreciate the investor's capital;
currency risk can arise due to political and economic factors that are emerging in the country;
interest rate change is a risk in which there is a decrease or increase in the interest rate of the country's central bank, entailing changes in the market for inflation.

The total risk of an investment portfolio is made up of all of the above. For an investor, it is important to assess not only individual securities, but also the overall level of risk on the stock market and in the economy.

In addition to systematic risks that the investor cannot influence, there are unsystematic risks that are caused by errors in portfolio management. The cause of these risks may be non-professional evaluation of investment portfolio instruments at the time of choosing an investment policy, irrational structure of invested funds. By improving the efficiency of investment activity management, negative consequences can be avoided.

Non-systematic risks are divided into:

credit risk occurs if the borrower or guarantors fail to fulfill their obligations;
industry risk can be associated with changes in a particular sector of the economy;
Business risk is associated with errors in the management of companies in which money is invested.

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