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Wednesday, September 5, 2012

Investment Strategy: Portfolios and Diversification

It is always necessary to understand the different forms of securities, but it is even more important to clarify how their different characteristics can be harnessed to accomplish an objective.
Portfolio is a collection of different financial assets mixed and matched by an investor for the purpose of achieving an investment goal.  Items which are considered part of your portfolio include any personally owned assets like real estate, bonds, stocks and even cash. A portfolio, like any other financial management, can be done by the individual investors or by banks, financial professionals and other institutions which are connected to the finance industry. In all cases, when making the portfolio, the investor's time frame, risk tolerance and the investment objectives are often considered. The value of an individual asset can be an influence to the risk ratio of a portfolio which is referred to as an asset allocation. In other words, a portfolio is a very important collection of files which includes the list of financial assets.
Basic Types of Investment Portfolio
The aggressive investment strategies are particularly suited for those who are willing to stomach high fluctuations in stocks value (high risk takers). It will be composed of stocks with propositions of high risk or high reward. The stocks in this type of portfolio are highly sensitive when it comes to the overall market.
The second investment strategy is the defensive strategies which are somehow the opposite of the aggressive portfolio. This strategy is not highly sensitive to the overall market and it is not usually risky. The defensive or conservative strategy is particularly suitable for risk averse investors who put safety before any prospective gain. Conservative portfolios will generally consist mainly of cash and cash equivalents, or high-quality fixed-income instruments.
The income portfolio is more focused on the ways in making money via dividends or other kinds of distributions to the stakeholders. The companies which are included here are somehow the same to the companies in the defensive portfolio. However, they should be able to offer higher yields. Income portfolio is meant for individuals with a longer time horizon and an average risk tolerance. Investors who find these types of portfolios attractive are seeking to balance the amount of risk and return contained within the fund.
The speculative investment strategy is the riskiest investment portfolio. It is often considered as the closest kind of portfolio to pure gambling. This kind of finance portfolio is known to have more risk than all the other types of portfolios. A typical speculative portfolio would consist of high risk stocks and forex trading.
Portfolio Diversification
More often, investors do not usually employ a single investment strategy. They tend to mix and match their investment to come up with a hybrid portfolio which includes combination of various investments strategies. The hybrid portfolio is known to be the most flexible investment strategy.

Portfolio diversification involves the distribution of an individual's wealth to other various classes of asset such as debt, cash, property, equity, gold and more. Portfolio diversification can provide both benefits and risk to an individual. Now, many people would ask why they should use portfolio diversification. One major advantage of this is that they will not experience much loss if ever one of their portfolios experienced a problem because it will be counterbalanced by their other portfolio.
Different securities perform differently at any point in time, so with a mix of asset types, your entire portfolio does not suffer the impact of a decline of any one security. When your stocks go down, you may still have the stability of the bonds in your portfolio.

1 comment:

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