Like most financial management strategies, an investment portfolio is uniquely individual and rarely comes in a “one size fits all” package off the shelf. Basically the creation of a workable investment strategy is a balancing of three main factors: risk, return, and goals.
To begin an investment strategy it is crucial to look at the reasons for creating an investment portfolio. For most people, investments are one of the primary means of building toward retirement. For others, investments may be a means of accumulating additional wealth. Some people create investment accounts for a specific purpose, such as college tuition for a child. Each unique individual will have specific needs from the investments, and these purposes will drive many of the choices as to how and where to divide the investments for the best results.
On the surface, the return on an investment is a simple matter of the interest or increase it will pay to the holder. In practice, though, many investments have complicated returns, whether because they are not precisely predictable, as with stock investments or other business ventures, or because the rate of interest paid may vary over time with different conditions. In cases such as these, the holder of the investment must estimate or predict the rate of return and make calculations based on the estimates. If the investment exceeds expectations, the extra return can be reinvested into the account, or can be diverted to other needs. When the investment fails to meet expectations, though, the effect can ripple outward and bring down other elements of the financial plan. The specifics of the rate of return and its predictability are elements of the risk of the investment.
Investments can range from highly risky to generally safe. Many times the rate of return increases with higher risk factors. It can be tempting to dive into an investment that promises a high rate of return, until the risk is weighed into the equation, making it clear that more money can be lost than might be gained with some extremely risky investments. In general, an investment portfolio should have a fair balance of low risk and medium risk investments. An investment plan that is tailored to rapid growth might increase the risk factor slightly, which must be considered along with the goals and needs for the investment funds.
Finding the Balance
The range of investment options includes stocks, bonds, money market accounts, as well as less traditional investment options such as real property, art or antiques, or commodities futures. The later group tends to be advanced investment alternatives, however, as they can have extreme risks that require knowledge of the field to fully appreciate. With the right knowledge, though, many different types of investment vehicles can have a place in an overall portfolio. One of the key factors in determining a useful investment plan is to understand your needs and devise a unique plan that fits. Without careful consideration of the unique reasons for the investments, it is just money out of sight somewhere. With a plan that includes goals, desired returns, acceptable risks, and clear steps to the future, though, creating a functional investment portfolio can be a simple matter.