If you are reading this article, that means that you already are confident that you want to invest in the stock market. In my last blog “Why is it a good idea to start investing now”, I provided some clear historical evidence proving that there is no place for fear when markets are volatile and uncertain, but a huge opportunity to buy stocks at a affordable level and to be part of the next bull market.
Once you made up your mind to invest, there could be infinite questions coming into your head: such as where do I start? What should my portfolio look like? What if I use some money to invest only for a short-term period (less than 1 year)? Should my portfolio include bonds too? What if I want to include a company or a sector I like?
Let's use some theory first. A portfolio is a pool of assets, whose expected return is maximized according to a specific risk level. There are many assumptions behind this model, but maybe the most important is that people behave in a rational way, meaning we all are going to choose portfolio A against portfolio B, if A shows more expected return than B, while maintaining the same risk.
As I mentioned in a previous blog “three things you should know before investing,” modern portfolios have at a minimum, the following structure:
Fixed Income (bonds)
The composition of the portfolio will vary depending on your risk profile. As standard categories across the investment world, these profiles can be divided into: conservative; moderate and aggressive. There are some banks that use 5 profiles to identify their clients, but I will keep it simple for the purpose of this blog.
Conservative: People may fall into this category for several reasons. First, they have liquidity means, meaning that they will need to use the money soon, and for the same reason they can not afford to take big risks.
It could also be the case that people in this category don’t want to take risks because of their age. People tend to take more risks in their 20s and 30s, and at some point, priorities and habits change. In general, people tend to think more about the consequences of their actions as they age.
Therefore, the portfolio within this category will hold mostly bonds. Bonds are much safer than stocks and they will provide income; every three or six months bonds will give coupons that will vary depending on the bond you choose. This portfolio usually doesn’t have alternative investments, and if it does it is mainly composed of Real Estate.
Moderate: People in this category would not necessarily have cash liquidity needs, but they don't feel comfortable having all their money invested in stocks. From time to time they will have to sell positions to purchase things they have wanted for a long time such as a house or car.
They will take some risks, balancing the holding on stocks with those in bonds, so the risk level is contained.
This portfolio would have a higher composition of stocks and bonds with higher risk (i.e. emerging markets) can be part of this portfolio too. Investments in private equity and hedge funds are available too.
Aggressive: Composed of people who tolerate having an exposure to stocks of 60% or more. Usually they are long-term players as they do not get affected by fluctuations in the stock market. They might be more active on opportunistic strategies, buying and selling if they see a high probability of success.
Aggressive Investors will have a bigger composition of alternative assets, especially in private equity and hedge funds.
As you see, a risk profile is an important input to consider while building your portfolio. That's why we have a model that will tell you, according to your liquidity needs, time horizon and risk appetite, the way your portfolio should look like.
Although it is more difficult for a regular investor to have access to this type of investment it is always good to know how the big institutions invest their money. The rapid evolution of markets, along with technological advances have made it possible to bring many of these ideas to the general public.
If you want to know what your portfolio should look like, stay tuned to the launch of our product.
Subscribe to Our Newsletter
At Spartan Capital Intelligence, our mission is to demystify Wall Street and simplify the investment process. Through our unique, AI-driven platform, we're able to provide innovative solutions for investors as we individually and collectively navigate this uncertain moment in history.
If you’re interested in learning more about our mission, platform, or services, please subscribe to our newsletter.