How To Mix Up Your Financial Portfolio
KEYWORD PHRASES: Building an investment portfolio from scratch.
It’s one thing to have an investment portfolio and another to have a thoroughly diversified one. For those of you who are building an investment portfolio from scratch, it is crucial that you have a good mix of various types of investments. A profile comprising of only stocks and bonds in Singapore or only real estate may not be a wise way of handling your finances.
All investors, invest with the sole aim of growing their wealth and the biggest deterrent in their path is risk. Anyone who wishes to invest has to either reduce the risk involved in the investment or increase their own risk tolerance. Either ways, risk is a factor that can make or break your financial endeavours. Having the right mix of investments helps in reducing the risk involved. When you allocate your assets in just one type of investment, you face the risk of losing all your capital if that investment fails. For example, you might assume that Google stocks will never go down but you can never know that for sure.
Having said that, there are some profound investors who don’t agree with this strategy. Warren Buffett, a billionaire investor said that ‘diversification is protection against ignorance.’ According to him if you know the ins-and-outs of the one company or sector you have invested in, then you don’t need to diversify your assets. But the average Singaporean investor seldom works towards acquiring that amount of knowledge to be extremely sure of their investments. Hence, diversification works for beginners, skeptics and workaholic investors.
What are your investment options?
Stocks and Bonds
Stocks or shares are a part of the ownership of a company. It represents a claim on the company’s assets and earnings. This option is viable for people who don’t mind taking moderate to high levels of risk to earn high returns.
Real Estate Investment Trusts
Real Estate Investment Trusts (REITS) are a great way for people to get into the property game. In Singapore property investments are rampant as it is a good way to earn passive income. The risk investors have to bear while investing in property is the rising interest rates.
Exchange Traded funds
ETF is another investment option that is traded in the stock market. So when you buy an ETF, you are buying into a basket of weighted shares. One example of this is the Strait Times, which is a collection of 30 stocks in Singapore.
Cryptocurrencies
These cryptocurrencies are increasingly being used for trading purposes. It’s volatile nature makes it ideal for investors to earn or lose large sums of money. Bitcoin, ethereum and litecoins are the three main types of cryptocurrencies in the market.
Savings Account
This is one of the most conventional ways of investing. If you are building an investment portfolio from scratch then you certainly need to begin by opening a savings account in a bank that has high interest rates.
Insurance
If you opt for an investment linked insurance policy, then you have both life insurance and investment components. Your premiums are used to pay for units in investment –linked fund(s) of your choice.
Factors to consider while allocating assets
Age
Some financial experts consider age to be a crucial factor in determining your asset allocation. According to a report published in Life Hacker, a common rule of thumb is that: 110 – your age = the percentage you should be investing in stocks. The whole idea of considering age is to make your financial profile less volatile as you grow older.
Risk tolerance
This is one of the biggest factors that all investors consider while allocating funds for various investment options. Your ability to lose a particular sum of money can determine the amount of risk you will take with your investment choices. In order to be a successful investor, you have to master the art of risk management.
Investment goals
Your investment goals depend on when you plan to retire, the number of people dependent on you, and the profession you are in.
Achieving the right balance
To begin with, you can either consult a financial advisor or take an online quiz to understand your risk tolerance. Once you have understood your financial standing, risk capacity and your long and short term financial goals, then you can actively work towards diversifying your asset allocation.
Everyone’s financial situation is different but there are a few generic tips that can help you achieve the right balance. One of them is to invest in index funds. Index funds are representative of the stocks of the entire market.
Other strategies that help in diversification are buy-and-hold and dollar-cost-averaging. Buy-and-hold refers to buying stocks and holding them for a long period of time. It is a passive-income strategy that most Singaporeans use for their investment profile. Dollar-cost-averaging technique of buying a fixed dollar amount of a particular investment on a regular schedule, irrespective of the share price.
The bottom line is that with the right balance of investment options and the correct knowledge of managing them can help you fetch long-term results. It’s up to you as to how to you balance your assets to achieve the best possible results. Let us know how you managed to mix up your financial profile while building an investment portfolio from scratch.
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