How to create an investment portfolio suited to your needs

Defining the risk profile and the objectives to be achieved is fundamental for configuring an investment portfolio that maximizes savers’ profits

When we go into a supermarket, we do not fill our shopping cart with a single product. On the contrary: we buy different foods, to satisfy different dietary needs. In the economic sphere, something similar happens. And the investment portfolio is the financial equivalent of the shopping cart.

An investment portfolio is, in a nutshell, the sum of the assets in which a person has invested. Its breadth knows no bounds: it can range from stocks, commodities and government bonds to mutual funds, bonds and real estate. Even alternative financing mechanisms such as crowdlending or crowdfactoring have a place. In short, it will be as diverse as its owner wishes.

This is not a closed concept. As the saver injects his capital into new assets, these become part of the investment portfolio. Likewise, when he withdraws his investment and collects his earnings, that product will disappear from the portfolio.

But keep in mind that, as Aristotle argued centuries ago, the whole is more than the sum of its parts. The investment portfolio is not the mere combination of a person’s investments. Behind it is a well-considered investment strategy, and every decision taken by its owner is aimed at generating profits and increasing his wealth.

So how does one go about putting together an appropriate investment portfolio?

Determine the risk profile

Not all investors are the same. While some seek to enjoy all possible security guarantees, others have no qualms about placing their savings in assets that can generate very substantial returns, even if they involve greater risk. The composition of the investment portfolio depends to a large extent on this factor.

Depending on the level of risk assumed, we can distinguish three investor profiles: the conservative, the average and the aggressive. The first one usually sacrifices high returns in exchange for protective measures. The latter, on the other hand, tolerates danger more easily, in the hope of enjoying higher returns. And between the two lies a grey area in which most savers find themselves.

What pushes a person closer to one end of this spectrum? Wealth is one of the most influential aspects. If a citizen is well off, he or she will have a cushion to fall back on in case of losses, and will not mind investing larger amounts in riskier assets.

On the other hand, savers with fewer resources cannot afford to put their financial stability at stake. Many work hard to get that little bit extra, which they then invest, so they look for safe products that do not compromise their financial health.

Personality also plays a role. After all, some people are more prone to take risks and others are more cautious and uncomfortable with uncertainty. This is why an honest exercise of self-analysis is necessary, to place oneself on a point on this scale.

Selecting products according to objectives

After the above reflection, the time has come to make decisions. Depending on the investor’s profile, it is more convenient to choose certain products or others when configuring the investment portfolio.

Fixed-income assets, such as Treasury bills or recourse crowdfactoring, are very attractive for conservative investors. Why? Not only do they guarantee the return on investment, but they also tell them before confirming the transaction what the return they will obtain will be. Although sometimes this is not very considerable, knowing this information from the outset is of great value to this type of saver.

For their part, riskier investors tend to opt for equity assets, such as shares or mutual funds. Although they do not know in advance what the returns will be, they will be substantially higher than in the previous alternatives if the chosen products increase in value.

And what about the objectives? People must ask themselves why they are starting in the investment world. And the answer to this question has to go beyond the mere obtaining of money. Is it to buy some asset shortly? Is it to have more capital when retirement comes?

In the first case, it will be more advisable to choose investment mechanisms that work in the short term, that is to say, that have a maturity period of less than one year. On the other hand, those who invest to increase their savings and do not have any urgency may be inclined to choose long-term investment mechanisms. Often, it will be several years before they can collect their returns, but these are usually higher.

In the latter situation, however, it is crucial to take into account the effect of inflation, since money loses value over time, and measures must be taken to counteract it.

The help of a financial advisor can be key to setting up a secure investment portfolio

Hire a financial manager. Or not…

Once the risk profile has been defined and the products have been selected, it is necessary to decide how to manage the investment portfolio. Savers have two options on the table: delegate the administration to experts in the field or, on the contrary, manage it themselves.

When you have invested in a multitude of assets, keeping an eye on the performance of all of them can be an arduous task. The saver will have to keep an eye on the ups and downs of the market permanently and, on many occasions, does not have the time to do so.

For this reason, many people turn to an external manager. Professionals specialized in financial matters are in charge of these activities, following the indications provided by the owner who, when contracting this service, no longer has to invest his time in this work.

But within these managers, it is possible to differentiate between two types. On the one hand, there are, as we have just seen, people who work in financial institutions and have the knowledge and qualifications to manage the investment portfolio efficiently, always for the benefit of the owner. However, sometimes it is not human beings who perform this task.

Technological development has led to the emergence of the robo advisor, an automated service that is responsible for advising and managing people’s investments autonomously.

These machines replace the human component with a set of advanced algorithms and, relying on artificial intelligence and big data, manage the portfolio based on the owner’s instructions. The latter simply communicates the level of risk in which he feels comfortable, and the robot calculates the products in which to invest, as well as the ideal ratio. However, the saver still retains the power of decision, as the final choice is up to him.

Diversify, review, reinvest

Once the strategy has been outlined and the products have been purchased, the investment portfolio is up and running. But even if the owner hires an external administration service, the work does not end there.

While it is true that the manager will be able to inform you about important changes in your assets and advise you on the ideal time to put them up for sale, the saver shouldn’t disengage completely. Their needs may evolve, and they need to adapt their portfolio accordingly.

Regardless of the risk taken by the investor, it is advisable to diversify the investment portfolio as much as possible to minimize the risk of losses and cushion the impact of downturns. The more products are combined, and the more diverse their sector or activity, the more protected the saver will be against market eventualities.

Finally, it is worth remembering that when an asset is sold, it is not always converted into cash. Part of the success of many investors lies in their ability to spot new opportunities and reinvest capital in them. After all, the investment portfolio is a living, constantly changing element, with a clear objective: to maximize its owner’s profits.

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