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How to Build the Best Share Portfolio – 5 Popular Portfolio Types

As the old saying goes – Never put all your eggs in one basket. This is especially true for anyone investing in stocks.

Before putting all your hard-earned money in a company whose share prices appear to be on the rise, the key thing to remember is – equity markets are volatile. Something as minuscule as a company rep getting bad press on social media or the resignation of the current CEO could negatively affect the share price of various stocks overnight.

If that’s where all your money is, well, be prepared to lose a substantial chunk of your investment.  That’s precisely why you need a solid stock portfolio that cushions you against these and other risks. It gives you some measure of control over your financial future.

This guide explores everything you need to know about building the best share portfolio. Here are 5 popular portfolio types to consider.

1. Building an Aggressive Portfolio

Aggressive investors seek out shares with high potential for returns. However, such stocks also have a substantial amount of risk attached to them, since they are prone to greater price fluctuations compared to the others in the market. This is what is referred to as a share’s beta sensitivity.

So, if particular shares have a beta sensitivity of 3.0, it means that they’re likely to move three times as much, in either direction, compared to the overall market.

To build an aggressive portfolio, you need to identify companies that are in their early stages of growth. They won’t be household names at that point, but should already be displaying accelerated earnings, and have a unique value proposition to boot.

The companies in this category to keep an eye out for are mostly in the technology realm, although they may exist in other sectors too. Keep in mind that proper risk management is crucial when building and maintaining this type of portfolio. This ensures that losses are kept to a minimum, and you cash in on the profits when the time is right.

2. Building a Defensive Portfolio

If you don’t have a huge risk appetite and would rather not take the aggressive approach to build a share portfolio, you should consider a defensive one instead.

Defensive shares don’t usually have high beta sensitivity. They’re relatively insulated against large market fluctuations. They are not affected by the underlying business cycles, so they do well regardless of the current state of the economy.

To build a defensive portfolio, you want to seek out companies that offer products and services that are essential to everyday life. These are usually the ones that deal with consumer staples.

These include items like household goods, foods, and beverages, hygiene products, alcohol, and tobacco – essentially products that consumers are either unable or unwilling to eliminate from their spending budgets, regardless of what their existing financial situation is. So, they’ll always be in demand all-year-round.

Investing in these companies is always a safe bet. Plus, several of them usually offer a dividend which is great for minimizing capital losses.

3. Building an Income Portfolio

Income portfolios focus on stocks that generate money from dividends or any other form of income distributed to shareholders. While some of the stocks in this category may also fit the criteria for those in a defensive portfolio, income shares are selected because of their high yields.

Investing in master limited partnerships (MLPs) or real estate investment trusts (REITs) are two popular choices for high-yield income-generating investments. REITs, for instance, offer individuals a hassle-free way to invest in real estate shares without actually owning the property.

Keep in mind that this category of stocks is not immune to the prevailing economic climate.

To build an income portfolio, you want to find stocks that maintain a high dividend policy, particularly in companies whose shares have fallen out of favour. These would usually be the ones in the utility sector and other slow-growth companies.

4. Building a Speculative Portfolio

A speculative portfolio is the riskiest of all the ones discussed so far. With the proper research, however, it can be the most profitable one of the bunch. Common examples of speculative stock include initial public offerings (IPOs) or shares for companies that are rumoured to be the subject of a takeover.

You can think of a speculative investment as buying a stake of land that’s rumoured to have gold deposits underneath. If you dig for gold and find it – jackpot! But, if you don’t, well… tough luck. You’ll just have wasted a whole bunch of money.

A speculative investment essentially involves buying shares, hoping that they’ll increase in value in the short term. For instance, you could invest in shares in a tech or healthcare firm that’s in the process of getting patent approval for a single breakthrough product.

You could also take advantage of the opportunity to buy cheap shares by valuation. It is particularly useful during hard economic times when companies and investments struggle to stay afloat.

It involves identifying companies with huge profit-earning potential but currently priced below what financial analysts consider to be their true market value.

5. Building a Hybrid Portfolio – The Best Share Portfolio

Hybrid portfolios involve venturing into other investments in addition to shares. A typical one would include some blue chip stocks, REITs, MLPs, and corporate or government bonds.

The proportions of each of the different investment classes in a single investment portfolio would be relatively fixed. The diversity you get from hybrids is that some of the investment classes historically have a negative correlation with each other.

Fixed income securities and equities are a prime example of this. So, that in itself is hugely beneficial in minimizing risk.

Find the Right Balance Based on Your Appetite for Risk

All in all, building the best share portfolio construction needs a whole lot of time, effort, and lots of research, to determine the right one or the right combination of the different ones that exist.

Having too little or too much exposure to a particular portfolio-type carries with it additional risks. So, finding the right balance is the key to reaping decent returns and minimizing risk.

Take the first step by opening a trading platform account and explore the different investment options available. Then start small and work your way up as you continue to gain experience.

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