How to Build an Investing Portfolio - 5 Strategy Examples
In this article, we go through what an investment portfolio is, how to build one and several investing portfolio examples.
Table of Contents
What is an Investment Portfolio?
The term investment portfolio simply refers to the assets that are owned by an investor. These could be stocks, bonds, currencies, commodities and even cash. There are also property investing portfolios, vintage car investment portfolios and so on. An investment portfolio aims to produce a return on the initial investment. Essentially, it is to make a profit. This can be done through a variety of methods. Further in this article, we discuss several investing portfolio techniques that you can get started with.
How to Build the Best Investment Portfolio
Building an investing portfolio does take some skill. Even professional advisors can sometimes get it wrong. However, some well-known investment portfolios are used by investors.
Some would use diversification strategies to ensure the portfolio is not heavily biased toward just one asset or sector. Investors would typically choose an investing portfolio percentage to allocate their capital which you’ll see in the examples listed below.
Many individuals choose an investing portfolio by age. Modern portfolio management theory tends to allocate a higher percentage of the portfolio towards stocks when the investor is young, with a higher percentage towards bonds when nearing retirement.
5 Investing Portfolio Examples
Let’s have a look at some of the different types of investment portfolios.
1. Dividend Portfolio
Dividends are payments made from some publicly traded companies to investors. They represent a share in the profits made by the company. Usually, these are paid every quarter and are mostly cash dividends.
When building an investment portfolio, many investors choose to focus on investing in dividend stocks that provide a high dividend yield. This is calculated by dividing the annual dividend by the share price.
For example, if Company ABC pays out a quarterly dividend of $3 per share then the annual dividend payment would be $12 ($3 x 4 quarters). If the share price was trading at $300, then the annual dividend yield would be 4% ($12 / $300). The annual dividend yield changes as the share price moves but is widely looked at by investors.
Learn more in the Dividend Investing Guide.
2. DRIP Investing
DRIP investing stands for Dividend Reinvestment Plan. The concept is for investors to invest dollar amounts instead of share amounts. First, the investor needs to decide how many dollars (or other currency) they can invest regularly, let’s say monthly.
By investing small amounts monthly, consistently throughout the year the investor will end up buying some shares when the price is low and some shares when the price is high. This helps to average out the cost of their investment.
The key is to keep buying small amounts but to also reinvest any dividend payments as well. It’s a technique that removes emotion from the process but can help to avoid trying to time the market which can be challenging.
3. Factor Portfolio
Factor investing portfolio theory is an approach that focuses on investing in stocks or ETFs that have known ‘factors’ driving their returns. The factors tend to fall into two categories: macroeconomic factors and style factors.
- Macroeconomic factors include analysis of the broad picture such as the economic cycle, interest rates, credit risk, inflation and so on.
- Style factors include analysis of the individual asset such as volatility, size, financial health and price discounts relative to the fundamentals (also known as value investing portfolio construction).
During the pandemic, there was a surge in demand from investors for technology stocks as the macroeconomic factor of lockdown caused more people to embrace technology for work and home.
Combining style and macroeconomic factors can be a powerful combination. For example, during the pandemic investors may not just focus on broad technology sectors using macroeconomic factors but may also analyse company reports to find financially healthy companies.
4. Coffee Can Portfolio
The Coffee Can portfolio theory may have a strange name but is ideal for long-term investors. The name dates back to old America in which people would place all of their possessions in a coffee can under their mattress and not touch them for a very, very long time.
In the financial markets, it’s the concept of investors using a ‘buy and forget’ mentality. It’s common for newbie investors to be more active when it comes to investing, buying and selling with short-term swings in the market.
The Coffee Can portfolio theory suggests buying high-quality stocks and not looking at them again for another ten years - similar to Warren Buffett’s methodology.
5. Warren Buffett’s 90/10 Portfolio
In 2013, legendary investor Warren Buffett laid out a plan in his letter to Berkshire Hathaway shareholders for how his wife’s trust should be managed.
In this plan, he suggested a 90/10 investment portfolio in which 90% should be invested in a low-cost S&P 500 tracker fund and 10% in short-term government bonds. The basis of the portfolio is to be invested in a variety of different stock sectors which the 500 largest companies in the S&P 500 stock market index provide.
Buffett had a particular preference for the Vanguard S&P 500 ETF. This is a fund provided by the investment management company Vanguard that tracks the S&P 500 stock market index. There are many types of S&P 500 ETFs for an investing portfolio. Learn more in the Best S&P 500 ETFs article.
How to Build an Investing Portfolio in 3 Steps
If you’re eager to get started, here is a quick step guide on how to build an investment portfolio.
- Open an Invest.MT5 account where you can invest in stocks and ETFs (exchange traded funds) from 15 of the largest stock exchanges in the world. You can open an account with a low minimum deposit of just €1.
- Deposit funds to make your first investment. There is no minimum deposit for bank transfers which are commission-free but can take up to three days. You can also deposit funds commission-free using Visa or Mastercard, as well as PayPal, Klarna, iDEAL and more.
- Click on Trade in the Admirals Dashboard to open the web-based trading platform to choose your investments. From here you can search from more than 3,000 different instruments, view their live price charts and invest directly from the chart too.
Conclusion
There are now many more individuals who are learning to build an investment portfolio for the long term. The effects of compound growth can help to build a long-term portfolio. However, it is easier said than done. Finding the right investing strategy is key to success. There are a variety of different investing strategies to choose from as highlighted in this article. Identifying the best one will require some trial and error.
Fortunately, you could get started with an Invest.MT5 demo account where you can test your theories and ideas in a virtual environment until you are ready to go live.
Continue Reading:
- Best Global Shares
- Top 10 UK Shares to Watch
- Dividend Investing Guide
- 9 Top Monthly Dividend Stocks
- Best S&P 500 ETF
- Best Vanguard ETFs
- What Are ETFs? ETFs Explained
- How to Trade ETFs with €1000
- The CFD Trading Guide
FAQs on Building an Investing Portfolio
What is portfolio in investing?
An investing portfolio is a collection of financial assets such as stocks, ETFs, bonds, commodities and cash. Investors aim is grow these investments over time for capital gain.
How do I create an investment portfolio?
An investment portfolio can be created in three steps. First, open an investment account with a regulated broker. Second, deposit funds. Third, invest in your chosen asset.
About Admirals
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or recommendation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.
