In its broadest sense, an investment portfolio is a collection of assets such as stocks, bonds, real estate, gold, and other assets that an investor may own. The term investment portfolio is also commonly used to apply to Mutual Funds.
A well-diversified portfolio that effectively compensates you for risk is efficient and effective.
Importance of building an investment portfolio
When you begin investing money in various financial assets, you are automatically constructing a portfolio. As a result, it’s critical to invest in a way that ensures your total portfolio is well-built and free of clashing assets or substandard mutual funds. The quality of your investment portfolio could be the difference between retiring luxuriously at 45 or never retiring at all.
When putting together a portfolio, keep your emergency money, spending habits, short-term goals, and long-term goals in mind.
We are Aikido, we offer fantastic guidance on starting your investment journey if you’re new to the world of finance and investment. We use a data-driven approach to help you make intelligent and evidence-based investment decisions.
Characteristics of a good investment portfolio
1.A good investment portfolio is Cost-efficient
A good portfolio meets its goals for the least amount of money. It’s possible that if your portfolio costs more than 0.20 percent to buy, it’s a better one.
What matters most is that you obtain appropriate value for your money. Transaction costs, custodian fees, and commissions, on the other hand, maybe a waste of money.
2. A good investment portfolio is diverse.
Diversification, a feature of mutual funds and exchange-traded funds (ETFs), involves purchasing various asset types with differing rates of return and return. Nobel Laureate Harry Markowitz once said that “Diversification is the only free lunch in investing”.
Diversification is a straightforward technique to turn your investment into a successful investment portfolio. Diversified funds that invest in various industries offer superior diversification and return in varying market conditions, implying that your portfolio will continue to grow.
3. A good investment portfolio makes a good return on investment
People invest because they expect a future return on their investment. If it weren’t for the return, there would be no point in investing.
The higher the return on an investment, the greater the potential profit for the investor. But, in today’s world, what constitutes a high but realistic return?
4. A good investment portfolio is Risk-averse.
A risk-free portfolio is not an efficient portfolio.
Risk is a feature of a well-designed portfolio. Every investment portfolio must have a certain degree of risk and return to reach its goals securely.
Unsystematic risk refers to the risks associated with individual assets in a portfolio. Every stock, corporate bond, government security, and commodity carries its own set of dangers.
Your portfolio shouldn’t put you in any more danger than is necessary to achieve your goals. For you, this will imply a portfolio that is primarily comprised of stocks.
5. A good investment portfolio has Liquidity.
To effectively manage risk, you should have both liquid and illiquid investments in your portfolio.
Liquidity is another important feature that makes a successful investment portfolio. This relates to how quickly a portfolio may be transformed into cash. Your liquidity needs must be logically linked to your individual circumstances. If you rely on the portfolio to make ends meet, it must be highly liquid.
If, on the other hand, your goal is to generate money for retirement, it does not need to be liquid in the short term.
Both liquid and illiquid investments must be included in a portfolio. Because illiquid assets are not listed on the stock exchange, they lack real-time pricing and are less unpredictable. It also helps you avoid making rash decisions.
6. A good investment portfolio is risk efficient.
A strong investment portfolio provides the predicted return you require while posing the least amount of risk. Risk efficiency is achieved by adequately diversifying your portfolio.
Knowing how much return to expect from a portfolio is the best way to judge its quality.
7. A good investment portfolio is Simple.
A solid investment portfolio avoids employing extraneous components and lowers complexity. If you have more than 20 securities in your portfolio, you can probably do better.
When it comes to choosing your portfolio’s building components, less is better than more. You should be able to swiftly analyze and evaluate the performance of your portfolio based on a few account statements that each contain no more than a few lines of information.
8. A good investment portfolio is Tax efficient.
Taxes must be kept to a minimum to improve the quality of your investment plan and the portfolio it generates. For instance, in the USA a holding period of one year and a day allows you to make use of long-term capital gains tax.
9. A good investment portfolio should be transparent
Your portfolio should have a formal investment thesis. This clarifies objectives and aids investors in sticking to their strategy and understanding why they made certain decisions.
You should know what each component of your portfolio is and what it is designed to accomplish.
Investing quantitatively can help improve returns, reduce risk, remove the error of judgment, and reduce risk. It is the evidence-based, scientific approach to investing.
It’s not easy building a portfolio that has all the qualities we’ve discussed, but you will be rewarded if you do. It can provide reliable passive income while diversifying and minimizing your financial risk. It can also help you achieve your financial goals earlier. If you want to quickly build a quantitative portfolio, you might be interested in Aikido Finance. We have a catalog of investment strategies and automate portfolio creation. Use the promo code ‘purplecow’ at checkout for a 10% discount.