There is a long going debate about the importance of diversification of portfolio for business setups. Researchers believe that a business needs to have 30 stocks for a borrowing investor, and 40 stocks for a lending investor. It is a simple principle that explains the importance of not placing all your eggs in one basket. It is because diversifying your portfolio helps reduce risks and keeps you afloat financially, regardless of the market trends.
However, you should know about the kinds of portfolios you can prepare before diversifying your portfolio. In this case, Bellwether Asset Management has you covered. Our experts can guide you about the 5 popular portfolio types to make an informed decision.
5 Popular Portfolio Types
Following are some of the most popular portfolio types that you should know about before making your next financial move.
The aggressive portfolio looks for outsized gains and deals with similar risks. You may find stocks for this kind of portfolio that have a high beta. This means, that these stocks experience a huge fluctuation in their prices in most cases.
For example, a stock with beta 2.0 will move almost twice the rest of the market in case of a change.
Investors dealing with these kinds of stocks tend to look for new opportunities and invest in startups that may or may not earn profit. However, they still consider the value proposition of these companies before making a financial decision.
You should look for companies that experience rapid growth if you wish to make an aggressive portfolio. While most of these stocks are in the tech industry, there are other places to invest in these stocks too.
However, you should ensure you have enough understanding of risk management if you do not want to face financial instability yourself.
The defensive portfolio is the complete opposite of the aggressive one. It includes stocks with low beta value and does not take much effect from the broad market movements. It is because no matter what kind of downfall the market experiences, these stocks remain sustainable as they are counted as essentials.
For example, the canned food industry is commonplace to find these stocks. You can also keep a lookout for other companies that offer consumer staple products. Some of these companies also offer a dividend, which can help you stay secure and earn extra money along the way. This will also help you reduce capital losses, which makes the defensive portfolio an effective choice for new investors.
The income portfolio focuses on making a profit from dividends or other stakeholder distributions. Interestingly, these income portfolios may have some stocks from the defensive portfolios, but they primarily focus on stocks that produce a high profit. The income portfolio keeps an eye out for investment opportunities and allows investors to enjoy higher profits in the long run.
The best way to run this kind of portfolio is to ensure positive income. The Real Estate Investment Trusts are a common example of these kinds of portfolios. Most investors look for chances to make higher dividend profits from these stocks. These companies also return a good amount of dividends to their stakeholders in exchange for tax status. This takes out the hassle of actually participating in a business and still earning profits off it.
For example, a person investing in real estate for their income portfolio will earn profits without the need to retain customers or run the actual business. In regards to real estate investments, homeowners and businesses may stay up to date on the latest recommendations and review how to financially prepare before investing in real estate.
However, there is also a risk to these kinds of portfolios. For instance, the economic climate may impact the value of your dividend greatly. However, these companies are a good opportunity for you if you wish to supplement your income and provide capital gains.
The speculative portfolios arguably have the highest risk for investors. Some people also believe that it is somewhat closer to gambling. These portfolios operate over initial public offerings (IPO), or stocks that might take over the market soon. For example, a healthcare company producing a groundbreaking product, causing its stocks to go up suddenly, is a common example of this. Similarly, a tech company could also experience something similar and improve its stock value, even overnight. Moreover, a new company that’s about to launch a new product, could also count under speculation.
These speculations can lead to losses or profits both, depending on your luck and the company’s success. While these portfolios are a bit risky, they are still an integral part of the market. However, experts believe that you should invest less than 10% of your assets in these kinds of stocks.
You can also read about the leveraged exchange-traded funds, which are another popular example of these speculative portfolios. These funds gain popularity because a single right investment can lead to big profits.
Bonds, commodities, and other forms of investment are an integral part of running a successful portfolio. Similarly, real estate and art are also common examples of these kinds of stocks. There is a lot of flexibility in these kinds of portfolios, making them the most diverse among all other alternatives in this list.
Blue-chip stocks are a common example of these kinds of stocks. These blue-chip stocks belong to high profile, stable companies, which are most likely to yield good profits but have expensive stock prices while purchasing. Another good addition to the hybrid portfolio is the government bonds, REITs, or MLPs.
The hybrid portfolio amalgamates stocks and bonds in a relatively mixed composition. This allows diversification around different tiers of stocks. This helps because equities and fixed income securities have a negative correlation if we assess historical records.
However, working with a hybrid portfolio requires keeping an eye on multiple investment classes simultaneously, which can be challenging for investors. However, people who know how to handle these hybrid portfolios have a much easier investment regime.
Investing in stocks requires diversifying your portfolio because it reduces risks and increases the chances of making stocks. Investors can choose between aggressive or defensive portfolios, which have high or low market fluctuation respectively.
They can also choose income portfolios for dividend profits. The speculative portfolios place cards on newer companies and have higher risks. However, hybrid portfolios use multiple investment classes to make the most diverse portfolio.