Introduction

As our world’s economy has developed, investing money has become more common. Today, people realize that instead of letting their money depreciate while sitting in a checking account, you can help your money appreciate through investments. In order to be successful in investing your money, it is a crucial element to understand how to build a financial portfolio. A financial portfolio consists of a collection of financial assets. People can make these portfolios themselves or hire professional financial advisors to make them and tell them where to invest their money. It is a highly believed idea that having diversification in your portfolio will help you appreciate your money to a greater extent. Although some portfolios may consist of the same assets, most portfolios have a different risk/reward ratio.

What is a Financial Portfolio?

An investment portfolio can be seen as just a collection of financial assets. However, many different types of financial assets serve different purposes. Some portfolios may include stocks, bonds, and cash. A stock is a financial instrument that allows you to acquire equity of a publicly-traded business. Someone who might buy a stock believes that a company has great potential and wants to invest their money in the company even if it’s not a large amount of money. Someone who might acquire a bond intends to have a set percent that they want to receive back if they loan their money out to possibly the government or other corporations (“What Is a Financial Portfolio?”). Even cash is considered an investment because the US dollar or other currency can fluctuate in value due to inflation or deflation. Some people may believe that some businesses will fail or do worse because they are outdated or because of competition, and those people can bet against the companies and buy puts.

Financial portfolios also include investments that may require a larger amount of money. A typical investment that involves a lot of capital is real estate. People buy real estate because it is a safer way to make a good profit; however, it can take a more extended time and effort to earn your money. Some real estate requires you to completely knock down and build a new building, while others allow you to just buy a building in a location that has potential, causing your building’s price to increase while collecting in that time. Further, many people own famous art or antiques that are rare and can increase in value when someone passes away or just over time. If someone really believes that a start-up business is a good idea, they can also buy a certain percentage of the company depending on how much money you give.

Essential Elements When Building a Financial Portfolio

A financial portfolio aims to help one organize their financial assets and see where all of their money is located. When building a financial portfolio, it is crucial to have diversification. This is an essential element because if someone only invests a specific stock and that stock plummets, then that person does not have anything else to back them up and has just defeated the purpose of investing their money in the first place. Therefore, using the diversification strategy allows an investor to reduce the risk of investments and increase their ability to earn money. For example, if the market crashes but you also have money in real estate, the real estate would not be affected by the market crash.

Risk/Reward Ratio

When it comes to building an investment portfolio, it is vital to understand your risk tolerance. In other words, you would need to know how much you are willing to risk to get a reward. Usually, when someone starts investing in the market, they have a low risk/reward ratio because they just want their money to appreciate; they do not care how much. However, once people start to see how much money they could make, they feel the need to put their money into riskier investments to make more money. Once learning more about the investment and starting to feel more confident, people begin to invest more into stocks with a high risk/reward ratio. When investing in the stock market, you can read a company’s volatility rate, which is key to understanding if a stock is risky. An example of a high risk/reward ratio is a start-up company because although it may seem like a good idea, about 90% of startups fail every year (Bryant). An example of a low-risk investment is investing in a big tech company like Apple or Microsoft because they will grow for a long time, and it is improbable that they randomly go out of business. For example, Apple’s stock has gone up over 460% in the past five years (Sun).

Discourse Community

Building a financial portfolio is not restricted to one profession. Some people believe that they do not have time to do research on investing and hire financial professionals to invest their money. However, if other people feel like they have some time to spare, they build it themselves after studying what they want to invest in. A widespread place to give your money to for investing is a hedge fund consisting of many financial professionals. However, many of the people who have invested the money themselves and done research have made massive communities through social media such as discord, Twitter, Reddit, and even Tik Tok. They try helping each other out by posting the stocks that they believe would increase. These social media groups, such as Wall Street Bets, have become very tight-knit and have worked together to influence the market.

Conclusion

A financial portfolio serves as a means to organize your financial assets. These assets may include stocks, bonds, and cash. People can expand their financial portfolios by investing in start-ups, real estate, and art. A key concept for building a financial portfolio is diversification. Diversification is investing your money in many different places and is important because it can lower your risk. When creating a portfolio, you need to figure out how much you are willing to risk to get a certain percentage reward back. People looking to invest their money without spending the time studying what to invest in can hire financial professionals to do it for them. However, some may not trust other people with their money and do not mind studying where to invest for a couple of hours a day.

Bibliography

Bryant, Sean. “How Many Startups Fail and Why?” Investopedia, Investopedia, 9 Nov. 2020, www.investopedia.com/articles/personal-finance/040915/how-many-startups-fail-and-why.asp#:~:text=In%202019%2C%20the%20failure%20rate,70%25%20in%20their%2010th%20year. 

Sun, Leo. “Where Will Apple Stock Be in 5 Years?” The Motley Fool, The Motley Fool, 4 Feb. 2021, www.fool.com/investing/2021/02/04/where-will-apple-stock-be-in-5-years/. 

Real Finance Guy. “Build an Investment Portfolio from Scratch.” Real Finance Guy, Real Finance Guy, 17 July 2019, www.realfinanceguy.com/home/2018/2/1/building-an-investment-portfolio-from-scratch. 

“What Is Volatility?” Options Volatility | Implied Volatility in Options – The Options Playbook, www.optionsplaybook.com/options-introduction/what-is-volatility/. 

“What Is a Financial Portfolio?” Northwestern Mutual, www.northwesternmutual.com/life-and-money/what-is-a-financial-portfolio/. 

“5 Of the Top Hedge Funds in 2020.” U.S. News & World Report, U.S. News & World Report, money.usnews.com/investing/funds/articles/top-hedge-funds-this-year.