How to Build an Investment Portfolio

Last Updated – Nov 17, 2022 @ 5:55 pm

For beginner investors, the task of building an investment portfolio is a lot of things – scary, intimidating, and overwhelming. But it’s also equally rewarding, exciting, and worthwhile.

Like most people, you might be wondering how you’re going to find your way through the jungle of key points and jargon that surrounds the world of investing.

To set you on the right path, we’re going to explain the basics of building an investment portfolio from scratch.

So whether you’re a new investor or you’re looking to learn more about your existing investments, this guide can help you gain a clearer understanding of where to invest, how to invest, and what to invest in.

What is an Investment Portfolio?

An investment portfolio is essentially a collection of different types of investments. Depending on the level of risk that you are willing and able to take, this portfolio should contain a mix of various assets, such as stocks, bonds, mutual funds, and ETFs.

These are all continuously managed and monitored together to achieve an investor’s financial goals.

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Types of Investment Portfolios

Before you learn the ropes of how to build your investment portfolio, you will have to know what the different types of portfolios are.

Growth portfolio

The overarching goal when building a growth investment portfolio is to create a higher return.

This includes investing in emerging industries, specifically in younger companies that have a potential for growth over the years. When it comes to this type of portfolio, it offers high rewards and risks. 

Income portfolio

This type of investment portfolio focuses more on securing a regular income source from investments. This can include buying stocks based on their dividends which can serve as your passive income.

Learn More: Income Investing – Best Income Generating Assets

Value portfolio

Investors who have this type of portfolio focus on buying the most affordable assets when it comes to valuation.

This portfolio can be extremely profitable when you start it during times of economic difficulties where investments and businesses are struggling to make money.

During this time, they are priced below their market value so it’s a great bargain that can provide great profit potential when the economy improves once more.

Aggressive portfolio

Unlike other portfolio types, aggressive portfolios take on more risks than others. This type of portfolio is best suited for those who are more risk tolerant and are able to maintain their investment discipline.

This can be a great portfolio type for younger people and those who don’t have families yet.

Moderate portfolio

As the name suggests, this type of portfolio is in between aggressive and conservative portfolios. This portfolio gives you a regular return on your investments, but not as much as the aggressive portfolio. It is also a lot more stable than aggressive portfolios. 

Conservative portfolio

This portfolio is suitable for those who are more risk-averse and want to avoid great losses during market fluctuations.

This type of portfolio is recommended for those who are close to their retirement years since they don’t have enough time to change their investment strategy if it fails.

Related: How to Build a Retirement Fund

Defensive portfolio

This type of portfolio centers on consumer staples that won’t be affected by economic downturns. Companies that make everyday products do well regardless of the state of the economy.

Related: How to Beat Inflation

Hybrid

A hybrid portfolio includes a diverse set of asset classes. A unique advantage of this portfolio is that it can easily shield you from experiencing huge losses because all your assets will simply balance each other out. 

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Components of an Investment Portfolio

Here are the different components of a good investment portfolio.

Stocks

Stocks are some of the most common assets today. It refers to buying a share or portion of a company which means that you become a part owner. The size of your ownership stake depends on how many shares you own. 

This can be an incredible source of income because once the company profits, stockholders like you will get a portion of the profits. This is called dividends. Shares may also be sold at a higher price at a later time.

Want to learn stock trading in the Philippines? Check out our in-depth guide here.

Bonds

When you buy bonds, it means you are letting a bond issuer borrow your money to use for growth and other efforts. A bond usually comes with a maturity date where the principal amount you used to buy the bond will be returned to you with interest. Bonds are not as risky as stocks, but the reward may also be lower.

Here’s how you can invest in bonds in the Philippines.

Real estate

Most people are familiar with rental properties, but real estate investment can also refer to other forms such as buying properties for cash flow or price appreciation.

If you’re curious about real estate investments, click here.

Alternative investments

Gold, cryptocurrency, and other volatile, non-traditional types of assets are considered alternative investments. It is generally riskier but can be beneficial if you are able to correctly identify the market and buy at the right time. Alternative investments may also include fine art, NFTs, jewelry, and collectibles.

Check out the best alternative investments in the Philippines here.

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Factors to Consider When Creating a Financial Portfolio

Creating your own investment portfolio doesn’t mean buying every asset that piques your interest and hoping for the best. Here are some factors to keep in mind when building your investment portfolio.

Time horizon

Your investment time horizon refers to how long you intend to invest your money or how long you plan on holding an asset.

Do you want to build a short-term portfolio or do you have time to wait for your investments to mature? Understanding your time horizon can help you know what investments to pick.

To determine your time horizon, go back to your goals.

• Are you saving for retirement?
• Or maybe for a vacation?
• Perhaps you’re saving for your child’s college tuition?

For example, a more aggressive portfolio may not be suited for those who are aiming to retire in the next few years since it won’t protect their current savings.

Risk tolerance

People will react differently to different market conditions. Some are able to handle risk better than others. If you’re risk averse, a moderate or conservative portfolio is best for you.

But what if you want to earn more? If you’re more risk tolerant, you can go for a more aggressive portfolio. Just remember, the riskier it is, the bigger the profit potential.

It is necessary for you to identify what level of risk you can endure early on in your investment journey.

For example, if you need your money in three years and you can’t lose any of it, it means you have a low risk appetite. If you invested your money in a high-risk asset and there is a downturn in the market, you may not be able to recover from it.

On the flip side, if you’re still a fresh grad who’s saving for retirement, you may be able to tolerate riskier investments.

Asset allocation

Asset allocation is the portion of each asset class in your portfolio. It also largely determines how your portfolio will perform in every market condition.

In simple terms, you need to decide which allocation is appropriate for your financial goals and risk tolerance. Based on these factors, you can determine the asset allocation that is most appropriate for you.

If you want to protect your money, it is always best to practice asset diversification.

Investing style

In the investment world, your investing style refers to how you’ll make your investment decisions.

Are you a conservative investor who’s more concerned about safety and security? Or are you a bold investor who is ready to take on the risk and reap a huge potential benefit? Or maybe you’re somewhere in between?

These questions show your investment style. It always pays to be more prepared and know what you want, so you can make the right decision when you see the right opportunity.

Keep in mind that your investment style today may change in the future, and that’s completely okay. The beauty of creating your investment portfolio is that you have the power to take control of your finances.

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How to Build an Investment Portfolio

Once you’ve decided on your direction and how you want to invest, it is time to build your portfolio and start putting your investment plan into action.

Step 1: Have an emergency fund

An emergency fund is a good idea for anyone, but it’s even more important for those who want to build an investment portfolio.

Ideally, it’s best to have three to six months’ worth of your living expenses saved in case of an emergency.

Emergency funds are also a great way to make sure you don’t need to pull out your investments because you ran out of cash on hand to cover situations such as sudden sickness, job loss, major car repairs, and others. If you pull out your investment before it matures, you may lose money. 

Step 2: Determine what your goals are

Go back to your goals. Is it for retirement? If so, how much money do you need to save? How long do you need to save?

Investing can be a complicated and daunting endeavor. To make the process easier, you need to be clear about your goals.

You need to know if you want to build a short-term or long-term portfolio. You also need to figure out your risk tolerance and what you can and cannot withstand.

Getting to know your goals will help you determine what assets to include in your portfolio.

Step 3: Research and Due Diligence

If you are considering diversifying your investments, you need to do your research and look into various asset classes. Don’t rush into building your investment portfolio, as it could land you in trouble.

Understand what you’re investing in and learn about its advantages and disadvantages. Read about their history and track the way they have performed in the past. Be sure to understand what you are getting into.

Remember, investing is not like going to the grocery store. You need to do your research and understand what you’re investing in, know how it will affect your portfolio, and how it will affect your financial goals.

Study the market

Investing requires a lot of time, effort, and research. Doing your research about assets is not enough. It is also integral to study the market.

The market is your gateway to investing in assets. It’s important to know how to read the current market condition and how it impacts your investments.

Investing is an ongoing process. It’s not something you do and then forget about it. If you want to be successful with your investment portfolio, you need to study the economic calendar and the news and be aware of any big event that could have an impact on the market.

Avoid FOMO

If you’re just starting to build an investment portfolio, there will always be a sense of fear of missing out. It’s natural to feel that way, especially if all your peers are investing in something and you don’t want to feel left out.

However, don’t make investment decisions simply because others are doing it, especially when it comes to high-risk assets. FOMO (Fear of Missing Out) can cloud your judgment and cause you to make decisions that can damage your investment portfolio.

At the end of the day, you are responsible for your decisions.

Step 5: Start Small

Don’t bite more than you can chew.

When starting your investment portfolio, be realistic. Take baby steps and start small. You don’t have to have a big portfolio overnight.

Even if your initial investment is just Php5,000, it’s a good start. You don’t have to invest right away in expensive assets to build a substantial portfolio.

Minimize investment turnover

When you buy and sell assets, you will incur trading costs, commissions, and taxes. If you frequently trade, your costs could add up and eat into your returns. As much as possible, avoid buying and selling the same assets frequently.

Investment beginners may choose to hold their assets longer, which means your profits have more time to compound.

Step 6: Start diversifying your investment when you’re ready

Investing is an ongoing process. When you’re ready, you can start diversifying your portfolio by including various asset classes in your investment plan.

You don’t need to wait until you have a substantial amount of money to diversify your portfolio. You can start small by doing this in increments.

For example, if you are building your portfolio with stocks, you can start by adding more stocks in different sectors. Once it grows and you build up more risk tolerance, you may invest in cryptocurrencies or NFTs. 

Give yourself time to learn

Investing is like running a marathon. If you want to finish the race, you need to give yourself time to train, build endurance, and learn about your assets.

It’s important to know and know everything about the assets you are investing in. Don’t try to learn about everything at once – start with one at a time.

In time, you will learn what is needed and what to do with your investment portfolio.

Step 7: Keep track of your goals and investments

The only way to measure your success with your investment portfolio is by tracking your investments and checking whether or not it is still in line with your goals.

If you are investing for retirement, for example, calculate how much you need to have to sustain a good life in your golden years. Don’t forget to factor in inflation. Make that amount your target. 

From time to time, look at how different asset classes in your portfolio perform. This way, you can adjust if needed.

Step 8: Know when to seek help from a professional

The last thing you want to do as an investment beginner is to stress yourself out.

Know when it’s time to take some time off and seek help from a professional, especially if you haven’t clearly mapped out your risk tolerance and investment goals.

Financial advisors can help you cut out the confusion and stress in investing. Think about it: you wouldn’t just draw your dream house on a sheet of paper and construct it right away without the help of an engineer or architect, right?

Professionals can walk you through the financial planning process and provide you with an objective analysis and guide you in making the right decisions for your investment portfolio.

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What Does a Good Investment Portfolio Look Like?

As a beginner in investing, it’s hard to tell what a good investment portfolio looks like. To protect you from market volatility, it’s always a good idea to not put all your eggs in one basket.

For young investors, it’s not uncommon to find portfolios with 80% to 90% stocks. This could be a mix of international and Philippine stocks with varying potential for growth.

You may focus more on emerging stocks if you are not risk-averse. But if you don’t want to take on risk, it’s always good to invest in bonds and other fixed-income securities.

Keep in mind that you should also prioritize cash and cash equivalents in your portfolio, especially if you’re going to follow a conservative investment style. This will give you higher liquidity.

For those who follow an aggressive investment style, cash and cash equivalents could be around 5% to 10% of their total portfolio. Those with an aggressive portfolio style may also invest up to 70% in bonds/equities, and 20% in fixed income securities (such as bonds).

If you follow a conservative investment style, keep your fixed income securities at 70% to 80%, and leave out the rest for equities and other investment classes.

Case studies:

• Person A
  • Age: 23
  • Investment style: Aggressive
    • Emerging market stocks: 40%
    • Stocks: 30%
    • Fixed income securities: 10%
    • Cryptocurrency: 20%
• Person B
  • Age: 40
  • Investment style: Hybrid
    • Fixed income securities: 40%
    • Stocks: 45%
    • Jewelry, art, and collectibles: 15%
• Person C
  • Age: 57
  • Investment style: Conservative
    • Fixed-income securities: 60%
    • Real estate: 20%
    • Gold: 10%
    • Stocks: 10%

Note: This is only a guide, not a hard rule. Every investment portfolio is unique.