A portfolio for an investor is his investments – investment in Mutual Funds, Debt Instruments, Equity Stocks, Insurance, Real Estate Investment, Investment in Gold & Silver, Forex and other financial instruments.
This composite basket is the portfolio mix where each instrument carries a degree of risk and return. It is therefore very important to identify the level of risk and return attached to each investment.
Now there are different types of investors – conveniently segregated as aggressive investor, conservative investor and moderate investor. An investor which has a 80%-100% exposure in Equity Stocks or investing in any instruments which has a high and perceptible degree of volatility (like Equity Stocks, Junk Bonds) are called Aggressive investor while an investor which keeps 70%-100% exposure in Fixed Income bearing instruments or instruments/Products with very low volatility (AAA Rated Bonds, Fixed Deposits) are called Conservative investor. While a Moderate Investor is one who has a low involvement in volatile stocks and at the same time a similar exposure to fixed income bearing instruments.
It is very important in current market scenario to asses ones future financial requirement before setting a portfolio mix. Not knowing ones financial requirement can be a dead investment i.e 90% in Real Estate and 10% in others – such investors find it very difficult to maintain a proper lifestyle as their money is locked into an investment avenue which is not readily converted into cash and they cannot pool money for sudden financial obligations. Investor should also have both a long and short term horizon for investment – long because their investment will act as a contingent fund and also helps in building wealth and short term because it will help in taking benefits of short term capital gains.
One thumb rule of an Aggressive, Conservative and Moderate investor is that it needs to be properly diversified. Diversification is a double edge sword – it helps in minimizing risk and maximizing return. A portfolio is said to be diversified when there are multiple asset class across different level of risk and return. For Aggressive investor, diversification would be holding a stock of 20 to 30 Stocks rather than betting on 2 to 3 Stocks and so forth with other types of investors.