Economic portfolio
What is a Portfolio?
it is a collection of a wide range of assets that are owned
by investors. The said collection of financial assets may
also be valuables ranging from gold, stocks, funds,
derivatives, property, cash equivalents, bonds, etc.
Individuals put their money in such assets to
generate revenue while ensuring that the
original equity of the asset or capital does not
erode.
Depending on one’s know-how of the
investment market, individuals may either
manage their portfolio or seek the assistance of
professional financial advisors for the same.
Types of Portfolio
4-The
1- income 2-growth 3- value
Aggressive
portfolio portfolio portfolio
Portfolio
5-The 6-The
7-The Hybrid
Defensive Speculative
Portfolio
Portfolio Portfolio
• This type of portfolio emphasises
more on securing a steady flow of
income from investment avenues.
In other words, it is not entirely
Income focused on potential capital
appreciation.
portfolio
• For instance, income-driven
investors may invest in stocks that
generate regular dividends instead
of those who show a track of price
appreciation.
• A growth-oriented portfolio
mostly parks money
into growth stocks of a
company who are in their
Growth active growth stage.
portfolio • Typically, growth portfolios
are subject to greater risks.
This type of portfolio is known
for presenting high risk and
reward aspects.
• Such a portfolio puts money into
cheap assets in valuation and
focuses on securing bargains in
the investment market. When
the economy is struggling, and
Value companies are barely surviving,
value-oriented investors look for
portfolio profitable companies whose
shares are priced lower than
their fair value. When the
market revives, value portfolio
holders generate substantial
earnings.
• An aggressive portfolio seeks
outsized gains and accepts the
outsized risks that go with them.
• An aggressive portfolio takes on
The great risks in search of great
returns.
Aggressive
• Aggressive investors seek out
Portfolio companies that are in the early
stages of their growth and have a
unique value proposition. Most of
them are not yet common
household names.
• Aggressive investment strategies: aim to make the highest returns
• Investor should have high risk tolerance
• Investor should have a longer time horizon
• Generally have many equities
Aggressive Investment Portfolio Mix
Bonds
15%
Fixed Income
10% 70-85% Equities
5-10% Fixed Income
5-15% Bonds
Equities
75%
• A defensive portfolio focuses on consumer
staples that are impervious to downturns.
• Defensive stocks do not usually carry a high
The risk. They are relatively isolated from
broad market movements.
Defensive • defensive stocks do well in bad times as
Portfolio well as good times. No matter how rotten
the economy is generally, companies that
make products that are essential to
everyday life will survive.
• Defensive investment strategies: puts safety over returns
• Investors should be risk averse
• Investors should have a shorter time horizon
• Consists mainly of cash and cash equivalents
• Goal is to combat inflation to protect the value of the portfolio
Defensive Investment Portfolio Mix
10%
15%
70-75% Fixed Income Securities
15-20% Equities
75%
5-15% Cash and Cash Equivalents
• Among these choices, the speculative portfolio
is closest to gambling. It entails taking more risk
than any of the others discussed here.
• Speculative plays could include initial public
offerings (IPOs) or stocks that are rumored to be
The takeover targets. Technology or health care
firms in the process of developing a single
Speculative breakthrough product would fall into this
Portfolio category. A young oil company about to release
its initial production results would be a
speculative play.
• Financial advisors generally recommend that no
more than 10% of a person's assets be used to
fund a speculative portfolio
•Building a hybrid portfolio
requires venturing into
other investments such as
bonds, commodities, real
The Hybrid estate, and even art. There
Portfolio is a great deal of flexibility
in the hybrid portfolio
approach
• The Hybrid Portfolio: Balances risk and return
• Investor should have an average risk tolerance
• Investor should have a longer time horizon
• Moderate amounts of equities, bonds, and cash and cash equivalents
The Hybrid Portfolio
10%
50-55% Equities
35-40% Fixed Income Securities
35% 55%
5-10% Cash and Cash Equivalents
Factors that Affect Portfolio Allocation
1- risk 2- time 3-investors’
tolerance horizon financial goal
• Investors’ risk appetite impacts how they are going
to allocate their financial assets and investments
into their portfolio. One can quickly gauge the risk
tolerance level of an investor from the component
of their portfolio.
Risk • For instance, conservative investors are often more
inclined to build a portfolio that comprises large-
tolerance cap value stock, investment-grade bonds, cash
equivalents, market index funds, etc. Conversely,
individuals with a high-risk appetite may include
investments like small-cap and large-cap growth
stock, high-yield bonds, gold, oil, real estate, etc. in
their portfolio.
• The time-frame of putting money on a particular
investment option is also quite crucial for building a
profitable portfolio. As the general rule suggests,
investors should modify their portfolio to achieve a
conservative asset allocation mix as they approach
nearer to their financial goals. It is followed to prevent
accumulated earnings of their investment portfolio
from eroding.
Time horizon • Typically, investors who are nearing their retirement are
recommended to invest a more significant portion of
their portfolio in less risky assets like – cash and bonds
and the remainder in higher-yielding options. On the
other hand, those who have just begun their career are
suggested to invest the larger portion of
their portfolio into high risk-reward investment options
for the long haul. A longer time frame will help them to
ride out the short-term market fluctuations and losses.
• another important factor that
influences the portfolio
allocation.
• To elaborate, those with long-
term goals are more likely to
investors’ invest in long-term investment
options like – equity funds, ULIPS,
financial goal stocks, debt mutual funds.
Alternatively, those with short-
term goals tend to prefer liquid
mutual funds, recurring deposits,
government bonds, treasury bills
and more.
Steps in Building an Investment Portfolio
1 2 3 4
Determine the Minimize Don’t spend Never rely on
objective of investment too much on a single
the portfolio turnover an asset investment
•Investors should
Determine
answer the question of
the
what the portfolio is
objective
for to get direction on
of the
what investments are
portfolio
to be taken.
• Some investors like to be
continually buying and then
selling stocks within a very
2. Minimize short period of time. They need
to remember that this
investment increases transaction costs.
turnover Also, some investments simply
take time before they finally
pay off.
• The higher the price for
acquiring an asset, the
Don’t higher the break-even
spend too point to meet. So, the
much on lower the price of the
an asset asset, the higher the
possible profits.
• As the old adage goes,
“Don’t put all your eggs in
one basket.” The key to a
successful portfolio is
Never rely diversifying investments.
on a single When some investments are
investment in decline, others may be on
the rise. Holding a broad
range of investments helps
to lower the overall risk for
an investor.
Diversification
• It is one way to balance risk and
reward in your investment portfolio
by diversifying your assets.
• a risk management tool that mixes
a large amount of investment
mediums within a portfolio
• Portfolios and diversification go
hand-in-hand
Diversification
• Two categories of risk affect investments:
• Systematic Risk: inherent to a market
that is unpredictable; impossible to
avoid
• The Great Recession
• Measured by a security’s beta:
• >1 - more risk than the market
• <1 - less risk than the market
• Unsystematic Risk: company- or
industry-specific risk inherent in all
investments
• Reduced by DIVERSIFICATION
Diversification
• Using diversification to combat unsystematic risk
• Portfolios include investments in unrelated industries
• EXAMPLE: as an employee of United Airlines, you
receive company stock every year. You realize that
your portfolio is susceptible to risk if the airline
company fails. What investments might you use to
balance this risk?
• Avoid investing in the airline industry or
companies that do business with airline industries.
Instead, invest in healthcare, clothing companies,
or other, non-related industries.
Diversification
• There are a lot of complicated ratios and opinions that allow for
portfolios to be diversified
• Understanding the basics of diversification is enough to invest safely
