A portfolio is a combination of financial assets that serves to achieve your financial objective. Assets can range from cold hard cash to real estate, to master limited partnerships, equities, and even art pieces. Depending on your objective and risk appetite, there are different types of portfolios that can help to achieve your goal. In fact, no one portfolio is entirely similar to another unless you mimic another person’s portfolio entirely.
That being said, there are different categories of a portfolio, and it is important to understand and recognize the different types so that you are able to adopt the most suitable type of portfolio to meet your financial objective. For example, if you want to have an extremely high ROI, you will want to have an extremely aggressive portfolio. Hence, today we highlight the most common types of portfolios you should know about.
1) Defensive Portfolio
Considered one of the safest portfolio. A defensive portfolio contains securities with low risk that are usually not affected by major market swings such as blue chip companies and utilities companies. These securities are usually fundamentally strong and will do better in a recession economy .
Imagine companies that make products essential to everyday life; they can function every day no matter what the market conditions are because their products are in demand.
A defensive portfolio is one that prudent investors want to own regardless of the market conditions as the assets are usually deemed as non-cyclical; they are not affected by the overall economic cycle, unlike growth stocks. Investors who consider themselves less risky and prefer a less active style of managing their assets are more suited for this type of portfolio.
2) Income Portfolio
Also considered as a portfolio for low-risk investors, an income portfolio is one that focus on making money through dividends; the objective is to generate constant cash flow. Similar to defensive stocks, these assets usually do not carry a high beta and are usually considered low risk and are fundamentally strong. However, the assets should offer higher yields. Some examples are dividend stocks, real estate properties, and REITs.
Investors who consider themselves as low risk but want to generate a constant amount of cash flow can consider this type of portfolio as it is generally safe and requires less management compared to an aggressive portfolio. This type of portfolio generally does extremely well with a high amount of capital.
3) Aggressive Portfolio
Considered a portfolio for high-risk investors. An aggressive portfolio has a significant portion of high risk and volatile assets (growth stocks, penny stocks, and commodities). Assets in this type of portfolio are not only high risk but also have high rewards.
Most aggressive investors hold assets that are in the early stages of growth; they seek out stocks that are in their early stages of growth. Unlike the defensive portfolio, investors of this type of portfolio are required to be extremely active as it can be extremely volatile. Due to this volatility, it also needs more frequent rebalancing to tailor the portfolio to market condition.
Investors who have the objective of growing as much money as they can with a low-risk appetite and can commit themselves to active research and trading should consider this type of portfolio. The key to success in this kind of portfolio is to keep losses to a minimum while taking profit.
4) Speculative Portfolio
Considered as the gambler’s portfolio, this is perhaps one of the riskiest portfolios around. Some of these assets can be initial public offerings, stocks of companies that may be researching a new wonder product, or even companies that are subjected to an impending merger or takeover. It is a portfolio that is not meant for safe investors.
That being said, having a speculative portfolio does not mean you should speculate stocks haphazardly. Similar to an aggressive portfolio, a speculative portfolio requires an extremely active management. Investors must scour the market for the best deals, conduct research on the market and companies assiduously, and have extremely good market entry and exit tactics. A buy and hold strategy will definitely not bode well for this type of portfolio.
Despite the risk and work needs to be done for this type of portfolio, investors may be able to reap huge profits in a short amount of time if they keep themselves well informed, active and conduct their research assiduously. Investors who commit themselves to the market and pride themselves as being a high-risk investor should consider this type of portfolio.
Your Objective and Risk Appetite Dictates the Type of Portfolio You Should Have
There are different types of portfolios out there in the market, and what we have introduced are only some of the more common ones. At the end of the day, the portfolio that you want to adopt should depend on your financial objective and risk appetite.
If you want to have an extremely high ROI and have a low-risk appetite, you can consider the speculative or aggressive portfolio. If you want to just “park” your money somewhere to let it grow, you can consider the less risky type of portfolios.
We urge you to take a look at your portfolio and see whether it suit your needs, risk levels, and objectives. If your portfolio does not complement well with your objective and risk level, it may be time to rebalance and research more about the different type of portfolios.
Bonds and Fixed Income