5 Steps for Creating an Investment Portfolio

5 Steps for Creating an Investment Portfolio
5 Steps for Creating an Investment Portfolio

What is a Portfolio?

A stock portfolio is a selection of stocks and other assets such as bonds, commodities, and financial securities that you have invested in. This group of investments is meant to help the investor to earn a profit while preserving his capital. Allocation of capital across the different asset classes will depend on the investor’s financial goals, timelines, and risk tolerance.

Steps in Creating a Share Market Portfolio

1. Identify/Understand Your Goals

What does the investor personally want to achieve with a market portfolio? Do you want a more aggressive approach of maximising profits and multiplying your net worth, or are you considering a more conservative approach of focusing on sustainability of the assets?

These decisions are informed by understanding the investor’s age, capabilities, risk tolerance, projected capital needs for the future, and goals.

Understanding the investor’s goals enables him to choose the right investment account for their needs. The taxable brokerage account will allow the investor to invest in stocks, bonds, mutual funds, and exchange-traded funds, as well as pay taxes on investment dividends and profits. Read the review for Indian traders for expert brokers where you can open an account.

2. Diversification

In building a portfolio, the investor needs to decide how he spreads around the capital. Some factors informing this decision include:

● Sector/Industry to invest in – examples here include transportation, telecommunications, banking, Information Technology, etc.

● Market Capitalization – this is defined as the company’s outstanding shares multiplied by the current share price.

● Risk – it is advisable to invest across a variety of sectors and market caps to re-distribute the risk of the portfolio.

3. Risk Tolerance

Risk tolerance refers to the investor’s ability to accept investment losses in exchange for the possibility of earning higher investment returns. This combines the time before achieving the financial goal and the ability of the investor to watch the market rise and fall without making rash decisions. Factors that affect risk tolerance include:

● Age – Younger investors tend to prefer riskier investments

● Goals – the sum required to reach defined goals is calculated and an appropriate strategy is recommended.

● Portfolio Size – a larger portfolio is more tolerant to risk than a smaller portfolio. However, a percentage drop is higher with a larger portfolio than a smaller one.

● Timeline – generally, more risk can be taken by the investor with a longer time horizon. The constant short term lows do not affect the longer term investor as the market shows an upward trend over the years.

There are three categories of risk tolerance that investors are classified into:

a) Aggressive – this investor works with longer timelines and has a higher risk tolerance. They are seasoned investors who prefer capital gains to a steady stream of income. The longer time horizon allows the aggressive investors to recover from fluctuations in the market. Their portfolios usually feature higher weights of stocks and equities.

b) Conservative – this investor avoids risk to his principal capital as much as possible. This portfolio prefers bonds to stocks. It is mostly used by retirees to pay for their living expenses.

c) Moderate – this investor takes some risk with predetermined loss percentages that he can handle. The portfolio has a 50/50 or 60/40 mix of stocks and bonds. The goal is to balance out opportunities and risk.

4. Allocation of Assets

This refers to the splitting up of the portfolio among different types of assets. This is dependent on the investors risk tolerance and financial profile. Two important factors to consider are age and future income needs. The different asset groups to include in your portfolio are:

Stocks – this asset class gives you part ownership in a company. Investing in grouped stocks such as mutual funds, index funds & exchange-traded funds is preferred to individual stocks ownership.

Bonds – this asset entails giving a loan to the government or a company for payment at a later date, with interest.

Exchange-traded funds (ETFs) – an ETF is a basket of shares or securities sold on an exchange. They trade on an exchange tracking a specific index.

5. Regular Review and Re-balancing of Portfolio

Timely reviews will show whether the asset allocation strategy is being followed appropriately. This should be done every six months or so. Proactively assessing and improvement to the performance of the portfolio will ensure that it continues to grow and deliver returns as predicted. For example, if there have been a turn of events politically making the portfolio volatile, one may want to decrease the weight of the volatile assets in exchange for more stable assets.

If the trader is using automated systems, it will rebalance the portfolio when needed. Reasons for rebalancing would range from a 20-25% movement in one asset class to reaching a goal & needing to exit the investment. A change in risk tolerance would also lead to portfolio rebalancing.


Financial planning has become a necessity to cope with inflation and achieve financial goals. Thorough research is a requirement for anyone looking to create an investment portfolio. As you continue in your journey of investing, make sure you align your risk tolerance to goals and timeline. The key to successful investing is diversifying your portfolio, lowering the risk to the investor.

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