How To Build An Investment Portfolio For Beginners: Explained

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Students want to know how to build and construct a beginner's investment and stock portfolio in Australia.

 

A well-designed and diversified portfolio is essential to any investor's success. As an investor, you must know asset allocation that aligns with your future financial needs and risk tolerance.

 

This blog will help beginners create an investment portfolio from scratch. You will learn the basics of building a portfolio and a systematic approach to constructing portfolios that fit your investment goals.

 

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1. What Is An Investment Portfolio?

 

An investment portfolio comprises a collection of financial assets that helps grow your capital to meet your financial goals.

 

You create a portfolio expecting your holding to either gain value or generate dividend income or interest.

 

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Risk tolerance, time horizon, and investment objectives are crucial when assembling and adjusting an investment portfolio.

 

 

2. Why is Investing Essential?

 

The fundamental objective behind investing is to earn decent returns and grow your money to work for you. Here are a few typical reasons why you need to start investing:

 

  • Due to rising inflation, your money is losing value in the bank. The 2.5% interest rate you earn in a savings account even comes close to the prevailing inflation rate.

 

  • You want to save for your retirement. The sooner you begin investing, the sooner you will grow your money. Taking advantage of compound earnings allows you to afford price rises from inflation and other market trends.

 

  • With so many platforms available, investing money online has become more accessible. Also, with so many professionally managed funds, you can find the perfect investment without researching a lot.

 

 

 

3. What Assets are Included In an Investment Portfolio?

 

So, what should be in an investment portfolio? Your investment portfolio can include a variety of investment instruments:

 

 

 

4. What Are The 3 Types Of Investment Portfolios?

 

You can have multiple portfolios structured with different assets based on investment strategy to suit another need. Considering the risk factor, a financial portfolio is classified into three main types:

 

 

 

Conservative Portfolio

 

  • It is ideal for investors with a low-risk tolerance, a short investment timeframe, or a need for much liquidity.

 

  • It focuses more on capital preservation than capital growth.

 

  • It usually includes lower-risk assets and securities with relatively low volatility levels and returns potential but a relatively high-income level. For example - a large proportion of investment-grade bonds, less volatile stocks like large-cap value stocks, broad-based market index funds, mutual funds, and high-grade cash equivalents.

 

 

An Aggressive, Equities-Focused Portfolio

 

 

  • It tends to have high volatility and return potential but a low-income level.

 

  • An aggressive portfolio is ideal for investors (mainly retirees) with a high-risk tolerance, a long investment period, and minimal requirement for liquidity. Their highly volatile nature doesn't make them suitable for beginners. However, experienced investors can consider such a portfolio to augment their income streams by picking assets in commercial real estate, floating-rate bank loans, and high-yield bonds.

 

  • The typical assets include companies that are not popular, are in the early stages of development, and have a distinctive value proposition. For example - a large proportion of domestic mid-cap and small-cap stocks and overseas equities in developed and evolving markets.

 

 

A Hybrid/Moderate Portfolio

 

  • Such a portfolio balances between conservative and aggressive portfolios in their risk level.

 

  • It offers a moderate mix of assets focusing on capital protection, income generation, and growth investments. For example - a fixed proportion of various assets, including stocks, bonds, art, and real estate

 

 

5. What Is A Investment Portfolio Example?

 

One of the portfolio examples is a conservative investment portfolio that constitutes 50% bonds, 20% stocks, and 30% short-term investments.

 

  • 50% of investment could comprise high-grade corporate and government bonds.

  • The 20% stock allocation could contain large-cap or blue-chip equities

  • 30% of short-term investments include cash, high-yield savings accounts, and certificates of deposit.

 

 

6. What Are The 7 Rules Of Investing?

 

There is no single portfolio investment strategy for building a high-performing investment portfolio.

 

However, you should follow the seven rules of investing when designing it. These are:

 

  1. Create an emergency fund before investing

  2. Clearly define your financial goals

  3. Understand your risk tolerance

  4. Perform necessary research about different types of assets available

  5. Save at least 10% of your present salary and increase it by 10% yearly.

  6. Diversify your portfolio

  7. Review your investment portfolio regularly

 

 

7. What Is A Good Portfolio For A Beginner?

 

A good investment portfolio depends on an individual's investment style, goals, time horizon, and risk tolerance.

 

As none of the investment portfolio types is risk-proof, investment professionals recommend a reasonable degree of diversification to reach long-range financial goals while reducing risk.

 

 

8. What Is The Number One Rule Of Investing?

 

The essential consideration while creating a portfolio is personal risk management. Decide what level of investment losses you can bear in exchange for the chances of earning higher investment returns.

 

Your risk tolerance depends on your investment duration to reach your financial goal and how well you can withstand market fluctuations.

 

Investors with long-term goals have more time to ride out uptrends and downtrends in the market and capitalize on the market's general upward progression.

 

Online calculators are an excellent tool to determine risk tolerance before creating your investment portfolio.

 

 

9. Steps To Build An Investment Portfolio For Beginners

 

Investment portfolio creation may look intimidating, especially when you are new to investing. Here are a series of steps to learn how to create a portfolio:

 

 

 

Step 1: Make Sure Your Finances Are In Order

 

The first step to building an investment portfolio is to ensure you have a good handle on your present financial situation. Things you need to do:

 

  • Maintain a sound budget

  • Pay off debt such as personal loans and credits cards

  • Creating an emergency fund that can last three to six months. 

  • Think about any significant upcoming expenses.

 

 

Step 2: Identify Your Investment Goals

 

The next step to creating an investment portfolio is to know your investment objectives. Besides building retirement savings, you may have other vital milestones such as:

 

  • Building a house/car deposit

  • Contributing towards your children's college tuition fees

  • Paying for a medical procedure

  • Organising a vacation

  • Investing capital to start a business

  • Leave a financial legacy to your childre

 

 

Step 3: Specify The Time Horizon For Your Investment

 

As different financial goals may have different time horizons, consider how long you stay invested and when you need your money when building a portfolio.

 

Generally, the longer your investment period, the more capable you are of making up for market declines. If you are investing for the short term, consider moving to more conservative investments with minor price deviations.

 

A financial advisor can help you balance and prioritise all you are working to achieve.

 

Examples of Long-Term Investments:

 

 

 

Examples of Short-Term Investments:

 

 

 

Step 4: Choose The Right Investment Accounts

 

Selecting the proper investment accounts is vital when creating an investment portfolio from scratch.

 

It is wise to open a high-yield savings account in addition to an IRA (individual retirement account). It enables you to access cash for living expenses while earning better interest than a regular savings account.

 

Opening a taxable brokerage account is worth considering if you want to access your investment funds at any time before retirement without paying an early withdrawal penalty.

 

 

Step 5: Find The Right Investment Asset

 

Once you've opened an investment account, you'll need to select the assets you want to invest in.

 

Here are some common types of investments that you can consider:

 

 

Stocks

 

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Stocks give you partial ownership of a company. You can invest in stocks through index funds, ETFs, or mutual funds. Based on how much risk you can take, you should allocate only 5% to 10% of your portfolio to stocks.

 

 

Bonds

 

A bond is money you give as a loan to governments or companies, which they repay you over time with interest. Due to being safer investments than stocks, they usually offer lower returns.

 

When choosing these fixed-income investments, consider factors such as the coupon, maturity, credit rating, bond type, and the general interest-rate environment.

 

Explore this article here to learn more about purchasing and investing in bonds in Australia.

 

 

Mutual Funds

 

Mutual funds let you invest in various asset classes, such as stocks or bonds.

 

Though managed by a professional fund manager, they also carry some risk lower than direct stock investment.

 

Mutual funds are preferable over buying individual stocks as they allow you to diversify your portfolio with a basket of securities instantly.

 

Discover valuable insights into purchasing and investing in mutual funds in Australia through this informative article here.

 

 

Index Funds

 

It is a type of mutual fund that tracks the performance of a particular market index or bond market index.

 

They are passively managed and don't require a fund manager to actively choose the fund's investments. That's the reason they charge a lower fee than ETFs.

 

Gain valuable insights into purchasing and investing in index funds in Australia with this informative article here.

 

 

ETFs

 

Unlike index funds, ETFs are investment funds that can be actively traded like stocks on an ASX throughout the trading day.

 

It can be a viable alternative if you want to avoid investing with mutual funds.

 

ETFs represent a large basket of stocks, grouped by sector, country, etc., and track a selected index or basket of stocks.

 

 

 

Cash

 

Your overall portfolio should be a mix of cash and some of the investment options mentioned above.

 

Including cash-based investments for portfolios, diversification is recommended for short-term investment portfolios.

 

You can choose from options such as high-yield savings accounts, money market accounts, and certificates of deposit.

 

 

Step 6: Determine The Best Asset Allocation For You

 

Another important aspect of portfolio building is deciding how much of each asset class you need.

 

Asset allocation, or splitting up your portfolio among different asset types, depends significantly on your age, present financial situation, future needs for capital, and risk tolerance.

 

Young people who don't depend on their investments for income can afford to take more significant risks to get high returns. Allocating a large part of their investment in stocks is ideal for them to receive the highest returns.

 

On the other hand, a soon-to-get-retired person should protect their assets and withdraw regular income from investments in a tax-efficient manner. Investing in bonds is recommended as it adds more stability to their portfolio.

 

Understanding your investing time horizons, risk appetite, and expected returns are essential to developing an effective investment strategy.

 

 

Step 7: Rebalance Your Investment Portfolio As Required

 

Don't set and forget your investment portfolio. Monitor your accounts diligently and rebalance your investments back to your strategic asset allocation from time to time.

 

Target-date funds or funds managed by a full-time financial advisor dynamically adjust themselves over time. So you don't need to readjust them periodically.

 

For other assets, you need to review your portfolio at set intervals, such as every six or twelve months, or when the asset allocation in one of the classes moves over a predetermined percentage, such as 5%.

 

For example, if you have 60% of stocks in your investment portfolio, which increases to 65%, you may require selling a few shares or investing them in other asset classes till your stock allocation returns to 60%.

 

When readjusting your portfolio, remember to consider the tax consequences of selling assets at that time.

 

 

10. How Do You Start A Share Portfolio in Australia?

 

It may be scary to buy shares during big market sell-offs; however, it is the ideal time to invest in most cases.

 

Savvy and long-term investors look for this market-wide sale to buy stocks at discounts. So, if you plan to create a share portfolio, consider the following vital things.

 

Set your investment goals, including your investment amount and investment period. Invest long-term to even out market volatility, reinvest the dividend income, and gradually increase your investment.

 

 

Step 1: Assess Your Risk Tolerance

 

Knowing how many risks you are willing to take is essential when choosing the right stocks.

 

 

Step 2: Find a Share Trading Platform

 

Different online share trading platforms vary based on minimum initial requirements. Usually, full-time platforms offering investment advice charge more than discount brokers, which only let you buy and sell stocks.

 

Compare different platforms based on their features, trading fees, minimum investment requirements, inactivity fees, etc. Decide based on how much investing knowledge you have and the time you can devote to making investments.

 

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The trading platform offers extensive trading features, social trading tools, and copy trading to imitate the trades of other famous traders.

 

 

 

Step 3: Plan Your Portfolio

 

Based on your risk appetite, choose from the four types of stocks categorised based on their market cap:

 

  • Penny Stocks: They are the highest-risk investments and trade for less than $5 per share

  • Low-cap Stocks: With a market capitalisation between $300 million and $2 billion, they usually carry high risk but can also offer higher returns;

  • Medium-Cap Stocks: Have medium risks; these stocks have a market capitalisation between $2 billion and $10 billion, providing a good balance between stability and growth.

  • Large-Cap/ Blue-Chip Stocks: These stocks are of larger and more stable enterprises with a market capitalisation of $10 billion or more. They are the least risky but also offer lower returns.

 

Having selected the type of stock for investment, spread your investments across sectors and companies, as diversification helps reduce the chances of losing. Avoid choosing cyclical stocks like oil, gas, housing, etc., as they are highly susceptible to market upturns and downturns. 

 

Choose quality shares with solid balance sheets and adequate cash flow and a business with a robust competitive advantage.

 

While stock selection takes extensive research, novice investors can consider buying ETFs that track the ASX 200. They are professionally managed and diversified, so you don't have to study different stocks and their annual reports to find the right stock for your portfolio.

 

 

Step 4: Start Small and Build it Over Time

 

The best way to get returns from the share market is to invest in small amounts regularly and stay invested for the long term. After all, stocks, on the whole, tend to rise in price.

 

Also, stay patient and don't react to short-term noise or unexpected events. The more you look at your portfolio, the more tempted you may become to trade the shares.

 

Remember, you aim to build wealth, not for the next week or month but the years down the track.

 

 

11. How Do You Start an Investment Portfolio with Little Money?

 

You don't need much to start; you can use small investments to build your portfolio over time.

 

Here are ten easy ways to start investing with little money:

 

 

Employer-Sponsored Retirement Plan

 

  • Money required to start - $5

 

  • You can choose the amount you contribute to your superannuation fund from only $5 per paycheck. As most super funds invest in mutual funds, your money can grow with the market as you earn

 

  • Suppose your employer doesn't provide additional superannuation payments or equivalent. In that case, you can open an Individual Retirement Account at a bank or via a stock broker. Look for providers with a low or $0 account minimum for IRAs.

 

 

Invest in Stocks

 

  • Money required to start - $10

 

 

  • To start stock investing, you need to open a low-cost brokerage account. Some brokers even offer commission-free trades, no fee, and no-account minimum to open the account. Investing with them can save money and earn better returns on your investment.

 

 

If you still need a share trading account, consider eToro, which is used by many investors in Australia and worldwide. You can create an eToro trading account HERE

 

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Invest in Fractional Shares

 

  • Money required to start - $1

 

  • Fractional shares are a good option for new investors with little exposure to the stock market and little money to invest. They can sign-up with a micro-investing app that allows them to buy portions of a single share of a company's stock instead of an entire share.

 

  • It is an excellent way to invest in top companies if you can only afford part of the share of the stock. Unlike retirement accounts, you can sell your investment anytime and withdraw your funds without penalty. However, you are liable to pay for capital gains on the profit earned from the sale of your assets.

 

  • Fortunately, many micro-investment apps don't charge fees or commissions for buying fractional shares; You can start investing with just $1 to spare.

 

 

Index Funds and ETFs

 

  • Money required to buy and sell index funds: $100

 

  • Individual stocks usually carry high risks. That's why beginner investors could invest in ETFs and index funds, a relatively safer option. These funds are a basket of investments that comprises dozens of stocks to track distinct assets, including stocks, bonds, or even the entire market.

 

  • Investing in an index fund/ ETF diversifies your portfolio across a range of stocks of companies in variable sectors, which makes them ideal for newbies in the market. You will find companies that offer low minimums and allows you to start investing with just $100.

 

 

Real Estate Crowdfunding

 

  • Money required to start: $500

 

  • Another way of investing with little money is to team up with other real estate investors and combine your funds with theirs and then invest in real estate. This way, you become a partial owner of the property. 

 

  • You will receive a share of the profits from the property sale or rental income earned. With crowdfunded real estate, you can start with a minimum capital of just $500.

 

 

High Yield Savings Accounts

 

  • Money required to start: $1

 

  • If you don't understand the stock market and are looking for a risk-free investment option, a government-backed high-yield savings account could be ideal. Due to low risk, returns are common; however, your capital remains intact regardless of market conditions.

 

  • Again, this is a long-term investment option. You will grow your money from high-interest rates of 2% to 4% and compound interest. By funding your account steadily, you can earn decent and safe returns on your investment.

 

 

Robo-Advisors

 

  • Money required to start: $100

 

  • Investing in ETFs through a financial advisor and investment manager could cost money. You must pay a fee to open a trading account with a discount broker.

 

  • Luckily there is a cheaper way to invest in ETFs and index funds while avoiding hefty fees and getting easier access to your money - Robo Advisors. It is an automated investing service that asks a few questions to assess your risk tolerance, investment duration, and investment choices to arrive at a customised portfolio plan.

 

  • Based on your risk appetite, it comprises ETFs ranging from more conservative to highly-aggressive investment options. After portfolio selection, the robo-advisor invests on your behalf at a nominal portfolio management fee of approx—0.25% of your account balance.

 

  • If you consider this option, look for robo-advisors with zero or low account minimums. You can start investing with this option for as little as $100.

 

 

Certificates Of Deposit (CDs)

 

  • Money required to start: $ Varies by bank

 

  • Similar to savings accounts, certificates of deposit offer you a high-interest rate if you park your money for three months or five years term. You can withdraw your money in between the term. However, you will lose interest income and incur penalty charges.

 

  • Due to government baking, CDs are virtually risk-free options but offer much lower returns than other investment instruments.

 

 

Micro Investing Investment Options

 

  • If you have no investing experience and need clarification about which investment option to choose, you can start with micro-investing. It is ideal for investors who refrain from investing due to market research, minimum investment levels, and trading costs.

 

  • Micro Investing is an easy way of investing that educates novice investors about investment options, the power of compounding, etc. and motivates them to begin saving.

 

  • You can invest in various assets, including stocks, property, and fixed income, with little starting capital at a nominal charge. This way of investing often appeals to people between 20 and 35 and comfortable using technology for their finance management.

 

  • Some popular micro-investing options include - eToro, Carrott, Stake, and BrickX. Though you may not earn much, it will surely give you the much-needed kick-to-start on an investment journey to building wealth.

 

 

 

12. Frequently Asked Questions (FAQs)

 

 

Can You Get Rich by Investing?

 

Stock market investing is a way to build wealth.

 

However, the high potential also brings higher risk and is more challenging than you think. 

 

People often fantasise about jumping into the market to make big profits quickly. Yet, this kind of success doesn't happen overnight.

 

In truth, achieving your financial goals requires setting practical expectations, dedicating hard work, and committing to long-term investment to grow wealth through trading.

 

 

How Do You Start A $1000 Portfolio?

 

While $1000 may not be considered a large sum, it is certainly worthwhile for investing.

 

You could consider any of the investment options below:

 

  • Buy a single stock through an online brokerage.

  • Open an option or a Forex trading account online and take advantage of leverage.

    Debt investment instruments such as treasury securities, savings bonds, and certificates of deposit are the best choices if you aim for capital preservation than growth.

  • Target-Date Funds are another excellent option for their simplicity of selection, management, and instant diversification.

  • With ETFs, you can customise a portfolio for as small as $50 or even $20. Combine ETFs with different risk profiles based on your risk tolerance. For example, put $250 into a growth-oriented ETF, $250 into a dividend ETF, and the rest of $500 into a bond ETF. 

 

Always seek the help of a professional financial advisor before making any investment decision. Investing carries risk. The above are just some general options for educational purposes. All these options come with risk. This is not financial advice.

 

 

What Are the Essential Tips For Starting Investing?

 

When starting an investment journey, here are some essential tips that you should follow:

 

  • You don't need to diversify your investment with a hundred different stocks. Spread your investment capital across 10 to 20 stocks in various sectors with 5% to 10% of allocation on each asset.

 

 

  • While it is advised to regularly review your investment portfolio, checking your portfolio every day won't grow your wealth. Having long-term investment goals and focusing on your portfolio's long-term performance is essential. 

 

  • Remove emotions as best you can. Stock investing can be a roller coaster due to market volatility. Whether it is a bull or bear market, you may make rash decisions if your emotions are not controlled. Choosing strategies that align with your risk tolerance and gaining experience with smaller investments will boost your confidence, help alleviate your emotional connection to money, and minimise losses.

 

  • Always save first and then invest. Ensure you refrain from taking out a loan to invest in any instrument.

 

  • When deciding how much to invest, make sure to keep at least 3–9 months as a contingency fund and consider investing the rest. It will avoid selling your long-term investment to meet short-term financial needs. 

 

  • Don't invest in a company whose business you don't understand and have no plans to hold for the next 3 to 5 years. Always study the company's business and fundamentals before investing to avoid losses.

 

  • Avoid falling into investing trends or stocks that most people are discussing.

 

  • Get cautious when the public is greedy, as it could be when the stock is nearing getting overvalued and due for a base formation. It doesn't mean you should stop investing; you may consider dollar-cost averaging.

 

  • Get greedy when people fear the markets; it is a good time to invest much cheaper and reap the enormous benefits of the upcoming bull market.

 

  • Learn by reading the prospectus to gain an overview of a company's future earnings, historical returns and projected stock price, fund charges, management, etc. It is beneficial when making significant decisions about a stock, bond, index fund, fund manager, and company you plan to invest in. Likewise, listening to the company's commentaries' post-quarter results is also helpful as it indicates its near-term expected growth and profitability.

 

  • Resist panic selling, as it is a sure way to lose money. Historically, markets have always recovered, and by panic selling, you are losing your compound interest that could value a thousand dollars in the future. So, stick with your quality investments to reap the long-term rewards.

 

  • When you start investing, think about arranging automatic reinvestment of dividends and capital gains. Reinvesting means you buy shares when their prices are both high and low. This approach helps you build a portfolio over time and take advantage of compound interest.

 

 

  • Always research and understand investing fees (including brokerage, transaction, management, and inactivity fees), as high fees can destroy your long-term returns.

 

  • Invest consistency and rebalance your portfolio at regular periods. Ensure the fund allocation follows your investment strategy, like 80% stocks and 20% bonds.

 

Thus, you can quickly build an investment portfolio and grow your wealth with a long-term perspective, the right approach, and professional advice.

 

Always seek the help of a professional financial advisor before making any investment decision. Investing carries risk. The above are just some general options for educational purposes. All these options come with risk. This is not financial advice.

 

 

 

When Is The Right Time To Start Investing?

 

You should start thinking about investment strategies as soon as you begin earning.

 

The sooner you start, the better! While the goal is to begin immediately, you should deal with the following first:

 

  • Pay off high-interest debt, as the interest you will pay will nullify any profits you earn on your investments.

 

  • Build a contingency fund to survive financially if you lose your job. Have adequate funds to help you manage at least three months of living expenses without any external income.

 

So, close your debts and build an adequate emergency fund before investing.

 

 

What Mistakes Should A Beginner Avoid When Investing?

 

Here are some common yet avoidable mistakes investors make when building a portfolio:

 

  • Investing in companies whose business you don't understand

  • Not doing your research and following the crowd.

  • Trying to time the market without any financial education or prior research. 

  • Selling investments out of fear during market fluctuations and waiting on the sidelines till investments retrace losses. 

  • Not sticking to an investment strategy and being overly aggressive about getting rich overnight. 

  • Investing before you are financially ready. It is good to save some money for unexpected occurrences before investing. 

  • Making investment decisions based on emotions and gut feeling

  • Not considering the tax implications of your investment strategy. 

  • Not deciding the proper structure to hold the investments.

  • Making illogical decisions based on impatience leads to premature selling. 

  • Buying penny stocks in hopes of generating more profits in less time.

  • Forgetting to compare trading platforms based on transaction costs, commissions, fees, and taxes

  • Expecting good stock performance to continue forever

  • Failing to assess the portfolio's performance periodically

  • Not using index funds that are less risky and requires less skill, knowledge, and time than investing in individual stocks

  • Too much investment turnover or hopping in and out of positions without realising the short-term tax rates and transaction costs could eat your profits and deprive you of the opportunity for long-term gains.

  • Waiting to sell your not-performing and declining investment till it returns to its original price can cause you to lose any profit you might have accumulated. 

  • Remember that everyone successful in investing must have failed at some point in their investment journey. People learn their whole lives. Acknowledging and learning from your mistakes can save you from repeating them and set you on the road to success. 

 

 

How Do You Set Up an Investment Portfolio in Australia?

 

Your investment portfolio is crucial in determining the returns you can expect to earn on your investment.

 

You need to consider various factors to build the right investment portfolio. Here is a step-wise guide to making an investment portfolio:

 

 

Step 1: Assess Your Finances 

 

The first step to setting up an investment portfolio is to review your current financial condition. It involves taking into account the following:

 

  • Income

  • Super

  • Assets like homes, jewellery, investment properties, etc. 

  • Contingency fund

  • Savings and government deposits (if any) 

  • Other investments

  • Liabilities

  • Expenses

 

 

Step 2: Define Your Investment Goals

 

Building investment goals becomes easier when you know your future expenses and investment amount.

 

In this step, you must identify your short-term and long-term financial goals. It will help you find the suitable investment to achieve each goal.

 

Once done, divide them into:

 

  • Short term (0 to 2 years)

  • Medium term (3 to 5 years)

  • Long time (5 years or more)

 

 

Step 3: Assess Investment Options And Their Risks

 

Almost all investment options carry some form of risk. The level of risk is directly proportional to the level of returns you can get from that investment option. The right investment option is the one that matches your risk tolerance while giving you decent returns.

 

Here are the different risks that can impact your investment value:

 

  • Interest rate risk (changes in interest rate could diminish your fixed-rate investments) 

  • Market risk (Capital depreciation due to economic downturns)

  • Industry Sector risk (decline in asset value due to events impacting that sector)

  • Currency movement risk (Fluctuations in foreign currency could affect your overseas investments or investment in domestic companies engaged in overseas operations) 

  • Liquidity risk (when you don't find a buyer whom you can sell your asset at desired market price)

  • Credit risk (when the government or company defaults on making repayments) 

  • Concentration risk (when your portfolio lacks diversification and is heavily invested in a specific asset)

  • Inflation risk (asset price changes with inflation)

  • Timing risk that could lead to lower returns or loss of investment

  • Gearing risk (Investing using borrowed money can amplify your losses)

 

 

The Risk and Return Relationship for Distinct Asset Classes is in Ascending Order:

 

  1. Cash (Lowest risks, Lowest returns, Defensive asset)

  2. Fixed Deposits

  3. Government Bonds

  4. Property

  5. Stocks (Highest risks, Highest returns, Aggressive help)

 

 

Step 4: Find The Right Investment For Your Risk Appetite

 

Having understood the different risks associated with varying options of investment now is the time to determine your risk profile based on your:
 

 

  • Age 

  • Financial health

  • Financial goals

  • Investment period

  • Capacity to recover from financial loss

 

In addition to the risk profile, consider the following to choose the suitable allocation to defensive, growth, and alternative assets:

 

  • Expected return on the investment – capital growth or dividend income

  • Period to get the expected return

  • Desired level of liquidity in an asset or the ease to sell your investment for cash.

  • Cost to buy and sell the investment

  • Tax liability on capital gains and income received from the investment 

 

 

Growth Assets

 

These assets mainly yield long-term capital growth and, sometimes, dividend income.

 

They are often volatile and involve higher risk than defensive assets. Growth assets include Australian and global shares and Australian and overseas estate and infrastructure.

 

 

Defensive Assets

 

These assets mainly yield long-term dividend income and, sometimes, capital appreciation.

 

Compared to growth assets, they have lower volatility levels and risks. Examples include - cash, fixed-interest investments, term deposits, and Australian and overseas bonds.

 

 

Alternative Assets

 

The ROI from alternative assets is unrelated to defensive and growth investments. Examples include - private equity, venture capital, and hedge funds.

 

Risk-averse investors should allocate more of their capital to defensive assets and less to growth and alternative investments and vice versa in case of aggressive investors.

 

 

Step 5: Structure Your Investment Portfolio

 

After deciding on the portfolio allocation, the next step is to structure your portfolio per your financial goals, risk tolerance, and investing time frame.

 

 

  • Longer-Term Goals – Investments that offer higher returns, like property, shares, etc., are suitable as you can ride out short-term decline in value in the long term.

 

 

Step 6: Diversify Your Portfolio

 

Having decided on the type of investment, next is to diversify your entire investment capital into different asset classes and within each asset class. It helps safeguard you against making significant losses if the one asset class fails.

 

Investors usually sort their portfolio into three groups depending on how skilled and experienced they are with investing, as well as how much time they can dedicate to staying invested over the long term:

 

 

  • Category 1: Low Skill Investors with Minimal Time: Multi-sector diversified funds and Managed accounts are good options to consider. You should monitor your portfolio once annually.

 

  • Category 2: Intermediate Skill Investors with Moderate Time: Single-sector exchange-traded funds and individually chosen, unlisted managed funds could be ideal for you.

 

  • Category 3: High-Skill Investors with Plenty of Time: Direct investment in shares, stocks, and fixed-interest investments is recommended. You should monitor your portfolios monthly or quarterly.

 

 

 

Step 5: Monitor Your Portfolio's Performance

 

A periodic review of investments is necessary to ensure they perform as expected and align with your financial goals. The ASX200 accumulation index (reinvestment of dividends) is a benchmark for Australian share portfolio returns.

 

If you hold overseas share portfolios, you can measure its performance against the S&P500 Total Return index (reinvestment of dividends).

 

Investors who own managed funds can look at the benchmarks published by their fund manager - market indices or a group of fund managers within the same asset category.

 

 

13. Conclusion

 

A portfolio is like the foundation of your investment journey.

 

It helps you create investment plans that suit your goals, like making money, copying an index, or keeping your money safe. It's important to spread your investments across different types, even if you choose a particular strategy.

 

Following our tips, you can make a strong, balanced investment plan that fits your unique financial needs and goals.

 

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The advice and information on OzStudies.com is in general nature and should not be seen as a replacement for independent financial advice. We strongly encourage readers to consult with financial experts regarding their own financial decisions and investments.


Please note that the information presented on OzStudies.com is solely for educational purposes. Every individual's financial situation is unique, and the products and services we mention may not suit everyone. We do not provide financial advice, advisory, or brokerage services nor endorse buying or selling specific stocks or securities. It's essential to know that information might have changed since publication and past performance does not guarantee future results.

 

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