Asset Allocation: Steps to follow when Creating an Effective and Profitable Investment Portfolio

Creating an investment portfolio is not an overly complicated thing. Robo-advisors available online or funds are some ways you can utilize to achieve a simple and sound portfolio.


Investing is not only putting your money then waiting for possible profit. Investing is more than that. If you want to profit from your investments to achieve your financial goals, you need to exert more effort. You need to know some basic strategies, terms, etc.

One of the more common terms in investing is "investment portfolio." An investment portfolio refers to all of your invested assets. It is like an envelope where you can see your investments and the corresponding percentage they represent.

As an investor, it is your sole duty and responsibility to know your investment portfolio. An investment portfolio is not a simple make-up of your investments; it is more than that. You should look carefully at it since a well-maintained investment portfolio plays an important role in an investor's success. New investors are sometimes too absorbed in gaining profit, and they forget that profit is just a part of investments. Investing has risks, and these risks and your goals should be the driving force when determining your asset allocation. Profit is not everything; being overly greedy might result in loss.

When you are investing, you should think of the portfolio you want. It should be something that would let you achieve your future capital requirement while demanding less stress. It should be a portfolio that gives you peace of mind while you are investing.

Knowing these, building an investment portfolio might look complicated and intimidating, but it is not. There are many ways that can make the process easier. You can use funds and robo-advisors to make things less demanding on your part or follow a systematic approach aligned to your chosen investment strategy. Regardless of the level of engagement you want, there are ways that you can utilize to have an effective and profitable portfolio.  And here are the steps to follow when doing one.

What is an Investment Portfolio?

An investment portfolio refers to the assets or investments an investor owns. A portfolio's assets and investments can include bonds, stocks, currencies, exchange-traded funds, mutual funds, cash and cash equivalents, and commodities. The term can also mean a collection of investments that an investor uses to gain profit while preserving the capital.

An investment portfolio is not a physical portfolio or physical space but more of a concept. It groups your assets and investments into one so you can quickly determine which asset has the largest share of your total investments or what percent of your money is in high-risk-high-return investments, low-risk-low-return investments, etc. In this age where digital investing is prevalent, a pie chart can best show an investment portfolio. You can also think of all of your investments being under one roof.

For instance, if you have 401(k), a retirement account, and a brokerage account, you should look at them as a collective or as one when deciding on how to invest in them. If you find this hard, you can opt for a financial advisor or robo-advisor who will automatically manage these things.

Components of an Investment Portfolio


Your assets and the different investments you own that are included in your portfolio are called asset classes. As an investor, you should ensure a good mix of asset classes in your portfolio. If you opt for an advisor, then they will be the one to do this for you. The mix of asset classes can also reflect your risk tolerance. A mix of assets is necessary to maintain balance and foster growth while managing and limiting the risks. An investment portfolio may have the following asset classes:

1. Stocks. Stocks are a common component of an investment portfolio. When an investor buys stocks, they become a partial owner of the company. They can earn in stocks through dividends or by selling the stocks they purchased at a higher price (if the company's performance is good).

2. Bonds. Bonds are another common component of a portfolio. Buying bonds means lending money to the issuer. An investor will earn in bonds through the fixed interest associated with them. Bonds are low-risk investments but also less rewarding.

3. Alternative. Aside from stocks and bonds, other asset classes can be part of a portfolio and serve as alternatives. These alternatives are assets whose value can multiply, like oil, gold, and real estate.


Types of Investment Portfolios

Your aim, risk appetite, and strategy determine the kind of portfolio you should strive to make. There are many kinds of portfolios like the three below.

1. Aggressive Investment Portfolio. An aggressive portfolio strives for the highest return. This kind of portfolio is best for aggressive investors who are not afraid to commit to high-risk investments if the prospective returns are also high. They typically have high-risk tolerance and have longer horizons.

An aggressive portfolio has an asset allocation that is mainly composed of stocks. The strategy tries to have high long-term growth through buying risky but profitable short-term stocks. There are also some bonds or other asset classes in the mix, but these are only about 15% of the total investments.

2. Moderate Investment Portfolio. A moderate investment portfolio also strives for high return but on a lower scale than an aggressive portfolio. Investors who find this kind have an average risk appetite and longer time horizons. Their average appetite aims to balance risks and returns. They seek long-term appreciation and current income.

A moderate portfolio has an asset allocation that still favors stock. Stocks have a slim majority of the total investment make-up hovering at around 50-60%. On the other hand, bonds' share is also significant in this portfolio with 35-40%. Sometimes, other asset classes are also in the mix, getting a chunk at around 5-10%.

3. Conservative Investment Portfolio. Conservative portfolios put safety above all else. They seek income and appreciation, but capital preservation takes priority. Investors with this portfolio seek to preserve their investment value since they have shorter time horizons and a lower appetite for risks.

A minimal risk investment strategy is the one being employed in a conservative portfolio. Investments are typically those fixed-income instruments, high-quality securities, and cash and cash equivalents. Unlike the previous two, bonds or fixed-income securities take the most significant share of the total investments at around 70-75%. High-quality equities, on the other hand, have a significant 15-20%. Also, cash and cash equivalents can take as much as 5-15% of the total asset allocation.


Steps in making an Investment Portfolio

1. Determine your goals and risk tolerance.


Before proceeding with the actual investment, you need to know first your goals and risk tolerance. These two are factors that affect your portfolio make-up. Asset allocation considers this two so that your investments will reflect your objectives and risk appetite so you can invest while having peace of mind.

2. Decide how you would like to proceed.

Investing is easier than ever, and creating a sound investment portfolio can be easier too. If you do not know how to create a diversified portfolio reflective of your risk tolerance, you can opt for alternatives. If you are not fond of DIY, you can use Robo-advisors. Robo-advisors are inexpensive "digital advisers" who can manage your investments while considering your risk tolerance and goals. But if you prefer the "human element," you can always count on financial advisors and online financial planning services to help and advise you.

3. Picking an account fit for your goals

To have an investment portfolio, you first need to have an investment account. There are many accounts available and offered by firms but choose the one fit for your goal. Accounts like IRA are suitable for the retirees and retirement goals since it is a tax-advantaged account. But if your goal is a house or growing your wealth, an individual regular taxable brokerage account might be good for you. A high-yield savings account might also work if your goal is to get the money you will invest within five years.

4. Choose your investments

Choose investments fit for your risk tolerance. You can have stocks, bonds, cash and cash equivalents, and other alternatives. You only have to make sure that the investments you choose can help you achieve your goals while satisfying your risk appetite.

5. Allocate and Diversify

Diversification is not simply having different asset classes in your portfolio. The aim of diversification is not to boost your returns but to protect you. So, when you are allocating your investments, make sure that you are also diversifying them. Pick assets that have returns that haven't historically moved in the same direction. For instance, if the other is falling, the other might be growing or also falling at a slower pace.  Through this, you can cushion yourself from a full blow or impact and be affected less.

Now, when you identified the investment that moved differently, allocate them based on your risk tolerance. If you are an aggressive investor, then invest more in stocks. If you are a moderate investor, still invest most of your money on equities while investing a substantial portion of it in fixed-income securities like bonds. Lastly, if you are a conservative investor, allocate most of your funds (around 70-75%) to fixed-income securities.

6. Regular reassessment

The share of the different asset classes in your portfolio might not remain constant but change because of price movements. Therefore, you need to regularly or periodically assess and rebalance it to restore its original make-up.