What is a portfolio?
In the world of finance and investments, a portfolio is a comprehensive collection of investments that indicate the style, success, and experience level of an investor.
Similarly to how a painter’s portfolio offers essential insight into their style, past works, and achievements, an investment portfolio shows an investor’s appetite for risk, understanding of investment strategy, and how diverse their asset collection is.
Diverse and well-managed portfolios yield bigger returns and are something every investor should aim to have.
What is portfolio strategy?
Portfolio strategy refers to the calculated use of portfolios to boost an investor's returns and make investment decisions that align with individual goals. It can also refer to a specific plan that you use to grow and advance, using the portfolio as a documentation tool for tracking investment performance.
An investment portfolio with a strategy can become effective and unlimited in its potential for achievement, lacking the structure and planning required to achieve ambitious financial milestones.
There are multiple factors that people should consider before they adopt a portfolio strategy. Some of the most important ones to consider are:
- Age
- Time available
- Risk assessment
- Financial goals
- Financial capital
- Assets
By assessing your individual position, risk appetite, and financial goals, you can align yourself with a strategy that best represents your interests. A financial advisor can also help you develop a strategy that will see the returns you desire.
Why would you make a portfolio strategy?
When approached in the right manner, a portfolio strategy can be instrumental in achieving specific financial goals. Strategy, in general, plays an important role in accomplishing any big task, and investment portfolios are no different.
A portfolio strategy is beneficial to any investor who wants to be consistent in their pursuit of financial growth and diversify their investments in a legitimate, effective way. The right portfolio strategy makes it easier to track the progress of past and current investments while highlighting which areas have the most potential for growth.
What are the different types of portfolio strategies?
While there are many different portfolio strategies to choose from, almost all of them can be placed into one of two distinct categories: active strategies and passive strategies.
Let’s take a closer look at each.
Active investment portfolio strategies
Active investors are people who autonomously purchase and manage stocks on a regular basis. Active investment strategies typically relate to hot, current, or short-term investment decisions that may or may not come with a higher degree of risk than passive alternatives.
A portfolio that uses a largely active strategy is likely to contain investment types that focus on quantitative and qualitative factors. These also tend to require a more hands-on approach.
If you are an investor with a high risk tolerance and a desire for uncapped growth potential, you might be more inclined to choose a portfolio strategy that experiments with active strategies.
Passive investment portfolio strategies
Passive investment strategies prioritize the long haul. Instead of buying and selling securities as they rise or fall in popularity, passive investors choose to impose strict limits on the amount of movement within their investment portfolios in order to slowly and steadily build wealth over time.
Comparatively less risky than most active investment strategies, passive investments are perceived as more conservative and stable approaches, albeit with lower potential for growth.
If you are an investor who prides themselves on predictable outcomes and financial stability, you may choose a passive portfolio strategy to demonstrate your commitment to your deals.
5 portfolio strategy tips to help you grow your portfolio
Portfolio growth and expansion are popular goals for successful investors. But if you lack experience in this competitive and unpredictable field, a few tips can go a long way. Here are five:
- Develop an understanding of market timing
- Diversify your portfolio strategy
- Establish your goals
- Get professional guidance
- Make sure some of your portfolio is liquid
Should I create a diversified portfolio as part of my investment strategy?
In short, yes, creating a diversified portfolio is one of the most common investment portfolio strategies used to spread or reduce risk. By investing in different asset classes, such as real estate, stocks, and bonds, you can reduce the financial impact if one of your investments fails to yield the expected returns. Creating a diversified portfolio allows you to build a buffer against market swings, recessions, and other economic factors that negatively affect your investments.
How can I align my investment strategy with my financial goals?
Your portfolio strategy should reflect your short and long-term objectives. You need to determine what you are saving for and the length of time that you have to see returns. For example, if you’re saving for a major purchase, your strategy should align with this and will probably include higher risk, higher return short-term investments. But if you’re saving for retirement, you can opt for long-term investments with minimal risk.
What role does asset allocation play in my investment strategy?
Asset allocation involves deciding how to distribute your investments among different asset classes. It forms a critical part of your investment strategy and your portfolio construction as it allows you to create a balance between high and low risk investments to ensure you meet your goals.
Are there tax considerations for my investment strategy?
Taxes can impact the returns on your investments and will differ depending on the investment type, where you’re based in the US, and whether you have any foreign investments in your portfolio. You need to consider tax-efficient strategies, such as tax-advantaged accounts, to ensure you minimize what you owe the state or federal government - or both.
How often should I review and adjust my investment strategy?
Strategic portfolio management is crucial to your success and involves regularly reviewing your investments to ensure that you’re getting the maximum returns. It’s best to review your strategy at least once a year, but it’s also good practice to do so whenever your financial position changes or you have new investment goals. This will ensure that you maintain your portfolio and that it aligns with your needs.
The bottom line
Portfolio management and construction are both important aspects of investing. Well-managed portfolios perform better and generally result in more sustainable financial growth. With these tips, you can develop a sound portfolio management strategy that considers all aspects of portfolio construction, not just the assets themselves.
If you need help with your portfolio strategies and investments, let Unbiased match you with a financial advisor. An advisor can ensure that your portfolio works for you, both in the short and long term.