TL;DR
Investing is a good way to build long-term wealth, but for beginners it can be challenging to make decisions about how to get started.
Building a personal investment portfolio is an important step toward achieving financial goals and requires careful planning and consideration of several factors, including the nature of those goals and your risk tolerance.
To maintain the desired asset allocation, it is necessary to carry out regular monitoring and adjustments to the investment portfolio.
What is an investment portfolio?
An individual's investment portfolio is the collection of assets he or she owns, including stocks, bonds, and cryptocurrencies.
Investing can be a great way to build long-term wealth, but figuring out where to start can be a challenge. This is especially true when considering newer investment options like cryptocurrencies.
Building a personal investment portfolio is a crucial step in achieving financial goals and requires careful planning and consideration of a few factors. Let's cover some important aspects related to building an investment portfolio.
Assessing risk tolerance when planning a portfolio
Risk tolerance refers to an investor's willingness and ability to bear possible losses. For starters, this involves taking into account your end goals, your current financial situation, your knowledge of investment products, among other factors.
Setting goals
The first step an investor can take to determine their risk tolerance is to define their financial goals. For example, common long-term investment goals include saving money for retirement or building wealth for future generations, while short-term goals might include buying a car or paying for higher education in the near future.
These goals can have effects on management and risk tolerance, as financial goals can determine the investor's time horizon, that is, the period in which he plans to hold his assets before selling them.
The longer the time horizon, the more risk an investor will be willing to take, as long-term gains can balance short-term price declines. When entering the market with shorter time horizons, such as planning to purchase a home in two years, losing some equity due to short-term fluctuations can significantly undermine that goal.
Current financial situation and obligations
Full awareness of current financial obligations helps an investor determine how much money he can invest without compromising on paying his bills, debts and other necessary expenses.
For example, a person with a stable income and an emergency fund that can cover medical expenses, job loss, or home repairs may be more willing to take on riskier investments, such as cryptocurrency investments. Generally, the recommended emergency fund is sufficient to cover an individual's financial obligations for the estimated time needed to find a new job in their industry, depending on their specialization.
On the other hand, someone who has not yet saved for emergencies may need to consider a heavy investment mix so that an unexpected setback does not result in the liquidation of high-risk assets, potentially incurring losses.
Understanding different asset classes when investing
Another factor an investor may consider when making decisions based on risk tolerance is their knowledge and experience with the assets they plan to add to their portfolio, especially if it involves cryptocurrencies. For example, if you have a good understanding of the crypto market and how cryptocurrency portfolios work, you may feel more comfortable taking on the risks associated with this investment category.
However, some newbie crypto investors prefer to start with smaller capital and increase their holdings as they become more comfortable with the market and volatility.
Strategic asset allocation for a balanced investment portfolio
Asset allocation is the process of dividing investments into different asset classes such as stocks, bonds, cash, and alternative investments such as cryptocurrencies. Each investor must find an appropriate balance that will help them achieve their goals.
Generally, a conservative investor may choose to have a higher percentage of bonds and cash in their portfolio. An investor with a longer time horizon may choose to have a larger share of stocks and cryptoassets. It is important to note that asset allocation is not a one-time decision and may need to be adjusted over time as investment objectives and risk tolerance change.
For example, an investor with a large cash reserve might allocate 70% of their capital to stocks, 20% to bonds, and 10% to cash. Allocating 70% of your portfolio to stocks can be considered a high-risk option. Still, if this investor is able to cover unexpected expenses with his 10% reserve, he may feel comfortable taking this risk.
Alternatively, a person nearing retirement might choose to hold more bonds and cash while allocating a small portion of their holdings to stocks and cryptocurrencies. If the money available is enough to cover expenses in retirement, a small portion of the funds can be kept in riskier assets.
How to diversify your investment portfolio
A diversified portfolio helps investors deal with price swings of individual stocks and cryptocurrencies. Investors have the option to spread their investments across different asset classes, sectors and regions, minimizing the risk of loss due to the concentration of investments in a single area or sector.
Some investors also diversify by investing in mutual funds or exchange-traded funds (ETFs). However, it is important to note that diversification does not guarantee profits or protect against losses in a falling market. Although it is a good strategy, it is not without risks.
Mutual funds and ETFs may be more appropriate for investors who prefer a more hands-on approach to diversification, as accredited financial institutions choose the pool of stocks and bonds included in these funds. The S&P 500 and FTSE 100 are excellent examples of indices that offer a practical approach. Investors can allocate a portion of their salaries to purchase these products every month.
If an investor prefers to diversify by choosing their own investments, there are a variety of products available, including individual stocks, bonds and cryptocurrencies. It is essential to conduct detailed research and understand the risks of each investment and the possible returns. Tools like Morningstar, Bloomberg and CoinMarketCap are good starting points.
How to monitor and rebalance your investment portfolio
Building a personal investment portfolio is not something that happens in a single event. It is generally an ongoing process that requires regular monitoring and adjustments. Investors should rebalance their portfolio periodically to maintain their desired asset allocation.
Adjustments may also be necessary if investment goals or risk tolerance change. Let's say an investor has a diversified portfolio made up of 60% stocks, 30% bonds, and 10% cash. Once he finds himself in a better financial situation, he may have a greater risk tolerance and be willing to take additional risks on his investments in search of more returns. Assuming the investor has done their research, they can adjust their portfolio to hold less cash and more Bitcoin. By increasing his Bitcoin holdings, he increases his potential for higher returns, taking on more risk in doing so.
On the other hand, rebalancing a portfolio may involve abandoning riskier assets in favor of more conservative options. For example, an investor approaching retirement might give up some of their riskier investments, holding on to bonds and cash.
It's important to note that adjusting a portfolio based on risk tolerance is a personal decision that should be considered carefully and aligned with financial goals and investment strategy. It's also important to regularly review and rebalance a portfolio as goals approach.
Final considerations
Building a personal investment portfolio is a complex process that requires time, patience and an honest view of the investor's current financial situation and expectations. There is no single correct approach to building an investment portfolio.
When researching the right holding assets, new investors should always be mindful of their risk tolerance and avoid financial gurus who may promote specific investments or portfolios promising astronomical returns with minimal risk. This process can take time, but new investors can emerge from this process more confident in their ability to manage their portfolios.
Further reading
What are cryptocurrencies?
How to set and achieve personal financial goals
Why and How to Do Your Own Research (DYOR) When Investing in Cryptocurrencies
Five Risk Management Strategies
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