Creating an investment portfolio and making it diversified is the most effective way to make investments today. An investor or financial manager has to consider a number of aspects to make this portfolio profitable. For example, it’s necessary to make well-thought-out decisions based on the goals of an investor, not just put money in random assets.
The concept of a diversified investment portfolio has its peculiarities, which make it better and more profitable than single investments. What are they, and how do you take advantage of them? To figure this out, we first need to learn about some basic terms.
Portfolio investments definition
An investment portfolio is a kind of collection, in which investors include different financial assets. The majority of participants compile this set with stock or bonds. The major purpose is to collect assets that might grow and bring good returns in the future. This type of ownership doesn’t require the investor to take part in asset management. In other words, when making portfolio investments, people expect the possibility of making a passive income.
Experts define two groups of portfolio investments:
- Strategic investment. This is when the buyer of certain assets aims to hold them, expecting those products to grow in a long term.
- Tactical investment. This approach is focused on achieving short-term gains. Investors buy products that are expected to grow soon.
How global events impact investment portfolios
It’s very common for global events to affect different financial markets and the prices of different financial instruments. This means that such events also impact the prospects of investment portfolios. Here are the most recent examples.
- US presidential elections. The USA has one of the strongest economies in the world. That’s why it’s understandable why its major event has such a significant influence on the stock market. Just consider data collected over the passing 90 years. We see a clear tendency – US stock and bonds perform better during the election year. The returns tend to go lower the next year after the elections. Even the party of the winner affects stock market performance. Democrats seem to be better for stocks in terms of potential returns.
- Brexit. When the UK decided to exit the EU, it had a big impact on the financial markets and assets. For example, after the decision was announced, the FTSE 100 index dropped around 9%. S&P 500 declined by 3.5%, while European indices, Euro Stoxx 600 and Germany Dax index, both went down by 7%.
- COVID-19. The coronavirus pandemic led to a long uncertainty period in many countries, which is never profitable for portfolio investments. The lockdown slowed down the financial development and made stock of some companies cheaper simply because investors started selling them, not knowing what could happen next. The pandemic also caused political instability in many countries, which led to declining performances of many global companies.
Trading Conditions with DotBig
Making portfolio investments might not be an easy task. However, you can make it better if you rely on professionals. If you decide to trade with DotBig, the company experts will help you to choose the most promising securities. The selection of financial products is wide enough to allocate different asset classes to your investment portfolio. Why do you need this? See the explanation below.
Pros & Cons of Portfolio Diversification
The capital investments’ portfolio diversification was initially designed as a way to mitigate the risks. However, such an approach has also some disadvantages. Consider both positive and negative sides.
- Investments in different classes of assets make the risks lower. For instance, if your diversified portfolio is divided into equal shares of different asset classes, the failure of one class will not cause you to lose the entire investment.
- It allows combining different goals. If you have both long-term and short-term goals, with portfolio diversification, you may invest in instruments that are supposed to bring returns both from long-term and short-term perspectives.
- Diversification gives a better growth opportunity.
- Portfolio diversification gives traders the opportunity to limit their exposure and invest not the whole capital.
- Different assets work differently, and the same goes for their tax policies. It’s more difficult to conduct efficient tax planning with a diversified portfolio due to the specific peculiarities of different asset classes.
- You run the risk of diversifying your portfolio with too many risky investments. If all the chosen assets fail, you will have declining returns.
In conclusion, creating an investment portfolio is a good way for you to make passive income. To make profitable investments, follow the news and keep track of the global events that can impact international financial markets. Try to mitigate the risks by diversifying your portfolio, and make sure to allocate stable instruments that will help to meet both your short-term and long-term goals.