Portfolio Investment- Creating a PI, Types, Taxes And Much More

Portfolio Investment- Creating a PI, Types, Taxes And Much More
Portfolio Investment- Creating a PI, Types, Taxes And Much More


A Portfolio is a collection of various assets such as hedge funds, stocks, and debentures. Simply put, portfolio investment can be defined as an investment in different securities and also grouping them. A portfolio can be individually managed or with the help of experts that are knowledgeable in the field.

Investors engaging in portfolio investment can structure their portfolio based on their investment objective of risk tolerance level. For instance, if actually, you want to take a risk in order to get high returns on investment, then more weight of your portfolio would have to be invested in equity.



Portfolio investment is not just limited to stocks, but it covers other assets such as the following;

  • Corporate bonds
  • Real estate investment trusts (REITs)
  • Government bonds
  • Certificate of deposit
  • Mutual funds
  • Exchange Traded Funds (ETFs), among others.


PI can also include Derivatives or options such as futures and warrants, a physical investment like commodities, as well as, real estate, timber, and land.


So many factors contribute to the composition of investments, some of which are investment Horizon, Investor’s risk tolerance, and amount invested. For a newbie investor that does not have many Funds to invest, Exchange Traded Funds of Mutual funds would be an appropriate investment portfolio. In the same vein, bonds, stocks, rental properties, and commodities would be an appropriate investment portfolio for a high net worth investors.


Institutional investors like sovereign Funds and pension funds may consider Portfolio Investment like investment in infrastructural assets like bridges and toll roads. Portfolio investment for this type of investors basically must have long lives in order for the assets duration and liability to match.


Portfolio investment ultimately depends on the circumstances of an individual investor. Those investors that have a higher risk tolerance may consider investing in one of the following;

  • Real estate
  • Stocks
  • Options
  • International security.


Similarly, conservative investors may opt for an investment in Government bonds and stocks of high net worth companies.

These inherent risks should be considered alongside an Investor’s goal and time Horizon. For example, a young investor that is planning and saving for retirement may have more than 30 years to save but is not comfortable with the inherent risk that fraught the stock market. Despite the long time horizon, such a person would want to favor a portfolio investment that is more conservative. Conversely, an investor with a higher risk tolerance that is nearing retirement age would definitely not want to allocate a huge sum of money to invest in a riskier Growth stock.



Investors that are saving because of retirement purpose should concentrate more on diversifying their investment portfolio. An index fund is a typical example to consider in this case. In terms of popularity, index funds are outstanding due to their exposure to several asset classes at a low-risk level. This type of investment is ideal for an investor nearing retirement. Those wishing to invest more may consider investing in private equity, real estate, as well as, individual bonds and stocks.



You sure will pay taxes as soon as you start making money from your investment. That’s inevitable. However, the big question is: when are you really ready to pay these taxes? It is important to make it clear at this point that some portfolio investments are tax-managed while some are taxable. What this means is that you have to pay taxes each year so long as you make a profit from your investment.


An account that is tax-deferred is arranged in such a way that you only pay taxes when you start making withdrawals. Some retirement accounts like the popular IRA falls in this category. Users of this account have nothing to worry about when it comes to paying of taxes. They can operate the account for decades without paying taxes.

The above may sound amazing but a lot of people still opt for an account that is taxable. The reason is that users of taxable account are getting rid of the taxes now. This makes it easy for such users to plan their finances. In addition, a certain type of investment are taxed at a very low rate, hence paying taxes now might be beneficial to you than paying it later in the future.



The major difference that exists in an investment portfolio is whether they are passively or actively managed. The nomenclature itself will give you an insight into how they operate. An active investment portfolio is an investment that is managed and coordinated by an investment manager. The manager does the job of buying and selling in a bid to make as much money as possible. What this means is that assets are traded constantly in order to make money. This can be great especially when market forces favor the investment and the investment manager is professional in his dealings. On the other hand, a poorly managed active portfolio investment could cost you a fortune. The investment manager gets his salaries and allowances, either way; therefore, some funds that would have been accrued to you go to the manager.


Conversely, a passive portfolio investment is the type of investment that operates as “set it and forget it.” This type of investment is set up to copy high net-worth stocks like S&P 500 and then allowed to run. A passive portfolio investment is easier to manage because you do not have to bother yourself with the day-to-day running of the investment. Additionally, you will save money that would have been used to pay an investment manager as fees.



You must have heard about Diversification of an investment. Well, Diversification means not putting all your eggs in one single basket. Therefore, a bad investment in a particular asset class will balance out with a good investment in another asset class. Ultimately, the aim of Diversification is to enable remain stable irrespective of the market conditions. Investment in an index fund is great, apart from the fact that is a passively managed investment, and it will aid to get instant Diversification.


However, there is a limit to the numbers of investment you should buy. For example, having a portfolio of more than 100 names would render the concept of Diversification useless. If you over-diversify, it would only force you to buy an asset class that is not investment worthy.


On the hand, a focused portfolio with few numbers of investments will provide you with the opportunity to choose and pick the asset class to invest in. You will also be able to monitor your investment, as well as the performance of your company.

It is very likely that the decisions you make will be based on its merit and you will totally be in control of the market.



The following are the top investment portfolio types available;

  • Income portfolio: This type of portfolio is targeted towards generating income without the loss of the Investor’s capital. Therefore, the payment schedule of the assets is expected to be stable. A major component of this portfolio type is a rental real estate, bonds, and dividend-paying stocks. Income portfolio works well when there is a high-interest rate in the market. However, if the interest rate is low, the income would not be sufficient for the investor.
  • Growth portfolio: Growth portfolio is likely to take more risk and primarily invests in industries that are growing. This includes private equity, Growth stocks, and venture capital. Even though these industries may not be profitable, Growth portfolio would load them up since they have growing revenue.
  • Value portfolio: Value portfolio buys primarily cheap investment by valuation. For example, when there is a crash in the property market, wise investors would go down hunting for properties that are cited in a good location but selling at low prices.
  • Hybrid portfolio: This type of portfolio means investing in commodities, bonds, art or real estate. This type of portfolio has a lot of flexibility. Traditionally, the hybrid portfolio contains asset classes such as blue-chip stocks, corporate bonds or government bonds.



The following are the steps to take in order to create a portfolio:

  • An Investment policy statement should be created: Creating an investment policy statement means you will itemize your goals, whether long term or short term, as well as your challenges.
  • An investment strategy should be developed: You need to create a strategy that would match your investment goals and challenges to the prevailing market situation.
  • Implement your plans: At this point, you need to put your investment strategy into motion.
  • Monitor and track your progress: Over a period of time, your goals and challenges would definitely change with respect to the market situation. Hence, it is necessary to monitor or track the market performance.



The following are the steps to take in order to diversify your portfolio;

  • Spread the wealth: Investment in a portfolio is wonderful. However, do not put all your eggs in one basket. Try as much as possible to avoid concentrating your investment in one sector or stock. Invest in more than one company that you know is trustworthy and reliable.
  • Consider bond or index funds: Consider adding bond or index funds to your portfolio. Investing in these assets class makes an awesome long-term Diversification. When you invest in these assets class, you are insulating yourself from market volatility and uncertainty.
  • Keep building: Keep adding more assets to your portfolio. A brainer, in this case, should be a lump-sum investment. This approach is targeted towards smoothing out valleys and peaks that have been created by market volatility.
  • Know when to back out: Buying and holding different assets class sounds interesting. The fact that your investment is on autopilot doesn’t mean you should totally neglect the conditions of the market. You need to stay current with market trends and then get information relating to the companies you have invested in.
  • Be attentive to your investment: In case you are not the type of investor that likes trading, you need to understand what you stand to gain from the fees you are paying. Some firms will charge you transactional fees while others will take a monthly fee. Be mindful of the kind of fees you pay so that you would not get cheated.




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