Introduction
Making investments is a perfect way to receive passive income in the long run. An investment portfolio can provide a client with sufficient income, savings, security, and raise the standard of living. A proper plan before investing is required to ensure the safety of the investment. The process of preparing an investment portfolio is the determination of financial objectives; it should correlate with the client’s available resources and desired goals. An investment portfolio considers investment horizon – the period for which the client is ready to invest. It involves the expected return on securities that the client can expect on the investment horizon. Furthermore, the investment portfolio includes tolerable risk – the maximum loss the client is willing to take on the investment horizon. It is crucial to explain and identify step-by-step actions to fulfill the investment portfolio.
Assessment of Current Situation
The essential step is to explain what can constitute the investment portfolio. Shares are equity securities that certify the investor’s right to share the company and its profit in dividends. The owner of shares can vote when making decisions in the chosen company. Bonds can also fulfill the portfolio, and these are debt securities, proving that the company borrowed the investor’s money and should return it to the set date with interest. Moreover, equities determine the value to return the company’s shareholders if all assets are liquidated. It is also possible to invest in property; everything depends on the client’s objectives.
The first step in planning an investment portfolio is assessing the current situation in the world. It is hard to predict the future; however, knowing what to expect today is essential. For instance, the current situation with COVID-19 made many firms close, their stocks collapse, and many investors continue to lose their money. Planning requires profound research on assets, cash flow, stocks, and company sales. For example, it would be helpful to learn about the company’s current situation in the market to understand the use of investment.
Moreover, it requires proper research on it’s abilities, and it is not recommended to invest in a single company. For example, newly appeared companies should cause alertness in investors, as it is unknown whether the stocks of this firm will be profitable. It is possible to argue and recall Tesla at the beginning of the 2000s when its shares cost little. However, those times Tesla started to manufacture new models of cars, which manifested successfully, and therefore, the company demonstrated good sales. In turn, there are no sales in some new companies, and accordingly, no investor’s profit. Thus, it is vital to learn its position in the market.
Even though the company might demonstrate proper sales and bring constant profit, nobody knows next. The investor might face a significant risk if the company’s shares collapse. Therefore, diversification is essential; it can help ensure safe profit. Moreover, holdings in various companies at home and abroad might be an appropriate solution for those ready to withstand a reasonable level of risk. As the client agrees to diversify his investment portfolio, investment in several local and abroad companies can satisfy his needs.
Identifying Investment Objectives
The next step is to identify investment objectives and establish desired profits. It is essential to learn how much risk and volatility the investor can assume. Furthermore, determination of the risk-return profile of the investor is necessary. For instance, the risk-return tradeoff suggests that the more the risk, the higher the reward. This trading principle connects these two notions and depends on multiple factors. For example, the client is tolerant to average risk withstanding, and the critical detail is that the client is an additional rate taxpayer. The client is not highly interested in ongoing income as he is still working; instead, he is concerned about capital growth and tax efficiency. The proper risk-return tradeoff mostly depends on the client’s years to retirement and the potential to substitute lost investments (Hargreaves Lansdown, n.d.). The client stated that he is working and ready to average risk; thus, he has the potential to replace losses and might be offered to invest in a more significant number of companies. A vast number of investing possibilities and an ability to withstand the risk can help the client receive stable capital growth and manage his taxes efficiently.
Allocating Assets
Allocating assets is another step to forming an investment portfolio. The investor should choose an appropriate asset allocation strategy, sticking to an expected profit to provide proper diversification. The investor also can choose various percentages for different assets. Indeed, it is vital to know the investor profile to determine the type of investments. For example, there are two main types of investors: conservative and aggressive (Merrill Lynch, n.d.). For a conservative investor with a short investment horizon, a financial consultant would offer companies that can already generate stable returns and pay dividends regularly and have announced a share buyback program.
For a more aggressive investor who is potentially ready to risk current returns and expect future growth in the value of shares, it is an excellent solution to allocate a part of the capital for risky investments. For instance, risky investments are newly appeared firms, recently established startups, and cryptocurrency. Although these investments are one of the most dangerous, it is worth investing when the firms are in the aggressive growth phase; there is a high chance of receiving huge profits. The potential return of stocks is more elevated than bonds, and the risks are more significant accordingly. Therefore, the more conservative client’s portfolio, the fewer shares the consultant will offer. As the client is ready to risk, leaving a tiny percent of his capital free is recommended. When a good offer appears, the client can quickly use it.
Purchasing Components for Portfolio
Next, it is crucial to determine what components to purchase for the portfolio. The client is comfortable investing in ETF, but he prefers his money investment to be held in a money market fund. ETF or an Exchange Traded Fund is an optimized fund allocated for investors. ETF contains certain assets, such as stocks and bonds of various companies; also, it might have gold and oil. When an investor buys shares in ETF, he becomes a co-owner of all the securities included in ETF. An essential feature of investing in ETFs is the commission payment for managing the fund’s property. As the client prefers his investment to be saved in a money market fund, it is vital to examine its possibilities. Money market fund is similar to ETF; these both are tools for collective investments when investors’ money is held in the fund’s portfolio. Money market funds and ETF trade on the stock exchange. The property managed by money market funds is also shares and bonds of large companies from one or several countries. If the client has a qualified investor status, global funds such as Vanguard, Blackrock, and VanEck become available for him. The last similarity is that stocks of money market funds and ETFs can be sold anytime.
The client wants to invest in physical share investments, and it might be a perfect decision to recommend a real estate investment. Due to the current situation in the world, prices for real estate have increased, and it is recommended to invest in it. Furthermore, the client is comfortable investing in the best 100 companies listed on the London Stock Exchange. According to its list, it is profitable to invest in Rolls Royce Holdings, Melrose, Prudential, Whitbread, and other companies (London Stock Exchange, 2022). Moreover, the client wants more than 40 percent to invest in equity securities. Holders of equity securities have ownership rights and make the investor one of the company’s owners. It is possible to fund about half of the capital in profitable companies such as Rolls Royce Holdings, InterContinental Hotels, Airtel Africa, and others.
Recommended Portfolio Components
As the client wants no more than 10 percent of the total funds invested in one company, it might be recommended to look at the abovementioned table. According to London Stock Exchange, these companies are some of the most successful risers in 2022 (London Stock Exchange, 2022). In addition, the client accepts short-selling of securities. It is important to note that short-selling is not always profitable, as it sells securities or currency that are not in the investor’s ownership. The trader borrows it and is obliged to turn it back to the broker. If the price falls, the trader will buy it cheaper and profit. Indeed, some banks impose sanctions on short-selling, which is not the most reliable option for investment. The client wishes to save 20 percent of his capital in his account, and if he is ready to risk and monitor the situation, short-selling might be permissible.
Protecting Assets
The last essential step is to protect assets from falling and provide the portfolio with maximum stability. It can be managed by leaving part of free capital, using option securities, or hedging using market futures. The client wants a minimum of 50 percent of the UK equities investment to be hedged using market futures or option securities. It is a reasonable decision, as hedging by futures allows fixing the asset price to save the investment portfolio from corrections. For instance, when the situation in the market is unstable, keeping assets becomes uncomfortable. Hedging is a method of saving securities by opening short positions in funds. In this case, opening short-selling is very recommended, as it can save profit for investors and compensate the loss from assets falling. As seen, it can be a perfect decision for keeping the client’s capital. Additively, using option securities fixes the investor’s paid right to purchase shares at the stipulated time and upon the occurrence of circumstances. In this case, the price is predetermined, and it is another solution to protect against adverse market movements.
Conclusion
In conclusion, it is seen that composing an investment portfolio is a complicated process. It is necessary to briefly recall the abovementioned steps: planning and assessing the current situation in the market and world, identifying investment objectives and desirable profit, allocating assets, purchasing components for portfolio, and protecting assets. This five-step strategy is one of the best options, as it includes various approaches and tools for investment. For instance, some other strategies offer clients to choose one reliable company and profit from it. Indeed, it is decided to diversify the portfolio, especially in these difficult times. Moreover, the abovementioned strategy takes risks into account and explains how to avoid them; it also examines the best options for long-term and short-term investments in money, securities, real estate and provides with best companies listed on the London Stock Exchange.
References
Hargreaves Lansdown (n.d.). ETFs and other exchange-traded products.
London Stock Exchange (2022). FTSE 100 risers.
Merrill Lynch (n.d.). What is asset allocation & why is it important to your portfolio?