A key focus of my blog is Financial Literacy/Money. One of the keys to money is generate returns from your investments. In order to do that, you must understand how to create effective investment portfolios. The following contributed post is entitled, How To Create An Effective Investment Portfolio.
* * *
You should always be trying to grow your money as much as you can. The more you can grow your money, the less money you need to earn to pay your bills. The less money you need to earn to pay your bills, the more free time you have to do what you love. That’s invaluable. With that in mind, here are some tips on how to create an effective investment portfolio.
What is an effective investment portfolio?
An effective investment portfolio, quite simply, is an investment portfolio that works for you. It can be inspired by what other people do. It should, however, indeed must, be driven by your personal situation. That means your needs, wants, goals, budget, and timescale.
Professional financial advisers may dive deep into intricacies like GIPS performance, investment ratios, and statistical probabilities. For everybody else, however, it’s usually enough to grasp the basic mechanics of the main forms of investment. That should be enough to get you in the right general direction. You can then study the specific topics that interest you.
There is, however, one lesson you can take away from professional financial advisers. They never beat themselves up over past mistakes. Every investor has at least one story about an asset they should have bought. If you start investing, you’ll almost certainly pick up at least one yourself. Learn from your mistake but let it go.
Liquidity basically means how easy it is to buy or sell an asset. This influences how far ahead you need to plan if you want to purchase or dispose of an investment. Tangible assets tend to be relatively illiquid. Real estate is particularly illiquid. It can take weeks if not months to buy or sell a property and there are often high costs involved.
Stocks, by contrast, tend to be fairly liquid. That said, there can be a lot of variation in their liquidity. It’s also important to note that trading stocks also incurs transaction costs and possibly taxes as well. Generally, therefore, your aim should be to buy and hold for as long as possible, rather than to buy and sell.
Understanding growth versus yield
Some investors aim to buy assets with a view to selling them, or part of them, when they have increased in value. Other investors aim to buy assets that generate an income (like rent or dividends). Many investors aim to do a combination of both although not necessarily in an exact 50:50 ratio.
It is, however, important to understand that, in the stock market, growth comes at the expense of yield and vice versa. Essentially, a company can either use its resources to grow or give a yield to investors. With tangible assets like real estate, however, you can have both growth and yield.
A standard disclaimer in investing is that you may get back less than you invested. This is true and it’s why you should only invest with money you can afford to lose. It’s also why you should diversify your portfolio to spread your risk.
Realistically, however, if you consistently pick solid investments, you should expect to make decent returns over time. You will, however, probably need to ride out temporary downturns. It’s important to be prepared for these both financially and mentally.