The five types of investment portfolios (basic information about each portfolio)

You’ve no doubt heard the famous investment maxim “don’t put all your eggs in one basket.” If you think about it, diversifying your hard-earned money is a logical decision. However, there are different ways to diversify, and there are many types of investment portfolios depending on the investment policy followed.

Diversification is one of the most important tools for reducing investment risk and one of the most important skills an investor must master. The first step in this direction is to have a thorough understanding of the most popular types of investment portfolios.

Types of investment portfolios

Building any type of investment portfolio requires a lot of research and effort. Below, we’ll provide basic information about five different investment portfolios and how you can get started with each one:

1. Aggressive Portfolio

It is an aggressive investment portfolio that includes stocks with a high risk profile, aiming to achieve higher financial returns. These stocks have a high beta (a measure of the degree to which a stock’s movement correlates with the movement of a stock market index), in addition to being generally highly sensitive to the market as a whole. This type of stock experiences greater volatility than other stocks in the overall market. This portfolio is suitable for investors who can tolerate high levels of risk.

Most companies offering this type of stock are relatively early-stage and offer unique value propositions. Building an aggressive portfolio requires an investor willing to research such companies, as most are not yet household names—with a few exceptions. Search online for companies with accelerating revenue growth that are not yet widely known. Most companies of this type are found in the technology sector, but there are many companies in other sectors that are implementing aggressive growth strategies. Try to keep these in mind when selecting stocks.

Suitable for the investor with a high tolerance for risk, risk management is very important when building an aggressive portfolio, because incurring only minimal losses and achieving maximum profits is the key to success in this type of investment.

Read also: The optimal investment portfolio for the best returns.

2. Defensive Portfolio

Defensive stocks don’t have a high beta and are largely insulated from broader market movements. Generally, these stocks resist economic changes and recessions, but rise more slowly than other stocks during periods of economic expansion.

Defensive stocks are companies whose prices remain stable or perform well during an economic downturn because they offer products and services that are in constant demand. This makes them perform better than companies focused on luxury goods or entertainment during economic downturns. Examples of this type of stock include pharmaceutical companies, food and beverage companies, utilities companies, consumer staples companies, and even drug, tobacco, and alcohol manufacturers.

Many of these companies also offer dividends, which further helps reduce capital risk, making a defensive portfolio a wise choice for most investors.

3. Income Portfolio

An income portfolio focuses on generating profits through dividends or other types of distributions to shareholders. These companies are somewhat similar to safe defensive stocks, but they offer higher returns. An income portfolio should generate positive cash flow, and real estate investment trusts (REITs) and master limited partnerships (MLPs) are excellent sources of income-generating investments. These companies return the vast majority of their profits to shareholders in exchange for a better tax position. REITs are an easy way to invest in real estate without actually owning a property. However, keep in mind that these stocks are also subject to the economic climate, and REITs are most affected when real estate construction and acquisition activity declines significantly.

An income portfolio is the best type of investment portfolio for those seeking a good additional return to supplement salaries or pensions. Investors should pay attention to stocks that have declined in popularity but still offer high dividend policies. These are companies that will not only provide a good return to supplement income, but also provide capital gains. Utilities and other slow-growth industries are an excellent place to start looking for this type of stock.

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4. Speculative Portfolio

A speculative portfolio is closer to actual gambling, and it poses greater risks than any other portfolio we’ve mentioned here. Financial experts believe that no more than 10% of an individual’s investable assets should be used to finance a speculative portfolio. Speculative “options” include initial public offerings (IPOs) or shares of companies considered to be acquisition targets. This category includes technology or healthcare companies developing a breakthrough product, or small oil companies about to release their initial production results.

It can be argued that the immense popularity of leveraged exchange-traded funds (ETFs) in today’s markets is a form of speculation. Again, all of these types of investments are attractive because choosing the right investment can lead to significant profits in a short period of time. A speculative portfolio is one that requires the most effort and research to succeed. Speculative stocks typically focus on trading, rather than on the traditional buy-and-hold investment approach.

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5. Hybrid Portfolio

Building a hybrid portfolio means expanding and including other investments, such as bonds, commodities, real estate, and sometimes even art. A hybrid portfolio is characterized by its great flexibility. This type of portfolio typically includes top-tier stocks, government bonds, or high-profile companies. REITs and MLPs are also good investment options in a balanced portfolio. A popular income investing strategy also supports the purchase of bonds with various maturity dates, which is considered a diversification method within the same bond asset class.

A hybrid portfolio essentially includes a mix of stocks and bonds in relatively fixed proportions. This type of strategy provides diversification across multiple asset classes, which is beneficial because stocks and fixed-income securities (bonds) are typically inversely correlated with each other.

Conclusion

These were the most important types of investment portfolios that every investor should be familiar with, how to manage and allocate assets within each type.  Building an optimal investment portfolio requires  more effort than passive investing or index investing. If you choose to do it on your own, you should monitor and rebalance your portfolio(s) regularly, but keep in mind that this will increase fees and commissions. Over- or under-exposure to any type of  portfolio  carries its own risks. However, despite the additional effort required, building  an investment portfolio will  increase your self-confidence and ability to invest, giving you control over your money.