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How Many Portfolios Should You Have?

There is no one-size-fits-all approach when it comes to investing. Just like with most things in life, you need to determine what works best for you.

Considerations such as your time horizon, risk appetite, and liquidity needs will all play a role in shaping your investment strategy. With that in mind, how many different types of investment vehicles should you have? That is the subject of this article.

The Answer: As Many As Necessary

In the section below, we will discuss how to structure your investment portfolio to best suit your needs and goals. Before we begin, let’s take a quick look at the different types of investment vehicles available to the average investor.

Stocks

Still think that the stock market is a fair game for the average consumer? Think again. While there are plenty of opportunities for the casual investor to gain large profits from the market, the risks associated with investing in stocks are quite high. Volatile prices, potential for large losses, and the fear of missing out can discourage even the most experienced of investors from participating.

For the average consumer, it is better to invest in a broad-based stock index fund that mimics the performance of the S&P 500. With low costs and minimal risk, many large-companies fall into that category.

If you are looking for gains and wish to take on more risk, then you can consider individual stocks. By taking on more risk, you increase your chance of greater gains. However, this comes with greater potential for greater losses as well. If you are looking for long-term stability then it is best to stay away from individual stocks and opt for an all-market-fund.

Bonds

Bonds are considered to be one of the safest investment vehicles around. As a matter of fact, many investors use bond portfolios as a safe haven during times of market uncertainty. Like stocks, bonds can be bought and sold on an exchange, allowing for relatively quick entry and exit strategies. If you are looking for a low-cost way to invest and wish to take on more security, then you can consider either a bond fund or a bond ladder. These are investment vehicles which own a basket of bonds of varying maturities. They are therefore quite stable, and have low correlation to the stock market. In essence, bonds are great for protecting your capital during market downturns.

Real Estate

As mentioned above, stability is one of the top considerations for any investor. If you are looking for long-term growth then you can consider purchasing real estate. Like stocks and bonds, real estate ownership offers the potential for capital appreciation as well as safety of principal. Naturally, there are many different types of real estate, so you will need to determine which one is right for you. When it comes to purchases, most investors will opt for a rental property, as they can typically obtain a good deal of leverage (i.e. borrowing) against the asset. One of the biggest advantages of real estate as an investment is the fact that you can build a strong portfolio which includes both residential and commercial properties.

Cash

If your primary consideration is to minimize costs, then consider putting your money into cash. While cash offers the potential for high returns, you must remember that it also has a high risk of loss. The simple explanation for this is that cash can be quickly and easily destroyed or diluted. For instance, if you have a portfolio which includes banknotes and coins then you are taking on a lot of risk. If you are looking for high leverage against stock market volatility then you can consider short-term investments in cash. These are highly volatile assets, and have historically paid well in times of market uncertainty. In today’s environment, very short-term cash investments in the form of short selling have become quite popular as well.

Which One To Choose?

As we mentioned above, there is no one-size-fits-all approach when it comes to investing. In light of the above, let’s take a look at which type of investment vehicle you should choose based on the unique situation you are in.

Time Horizon

One of the main considerations which must be made when choosing an investment vehicle is the time horizon of your investment. If you are looking for short-term stability, then you will want to avoid anything which is excessively risky. Stocks and bonds which are issued by smaller-sized companies are often considered to be higher-risk ventures, as their prices can fluctuate wildly. For instance, if you are looking for short-term gains in a matter of months or years, then you can consider opting for stocks or short-term bond investments.

Risk Aversion

Your risk appetite is another important consideration when choosing an investment vehicle. As we discussed above, there are some pretty high-risk ventures which offer the potential for large gains. However, this comes with considerable risk as well. If you are looking for long-term gains then you will need to take on more risk than your comfort zone would allow for. In general, many sophisticated investors will avoid taking on too much risk and will use hedging strategies or put on put options, which we discuss below.

Liquidity Needs

If you need your capital quickly then you can consider more traditional investments such as stocks and bonds. There are a variety of these vehicles which are ready and willing to be sold, allowing for quick and easy withdrawal. In times of market uncertainty, cash is often the best choice due to its short-term nature. Naturally, the opposite is true if you wish to be long-term invested or wish to take on more risk.

Which Type Of Risk?

Now that we have discussed the various issues which bear upon your decision-making process, let’s take a quick look at the different types of risk which you must consider. While stocks and bonds are highly desirable due to their historical performance, you must remember that they come with the all-around risk of fluctuation.

Volatility

If you are looking for high-risk, high-return opportunities then you should consider taking on more risk by investing in stocks and bonds. Naturally, this comes with the attendant risk of large losses as well.

Correlation To Stock Market

Your chosen investment vehicle must also be relatively uncorrelated to the overall stock market. Similar to the above, it is desirable to purchase investments which are not too heavily influenced by the movement of the overall market. Stocks and bonds which have been classified as “overloved” by the market are often overpriced and offer little when it comes to actual performance in the face of market corrections.

Summary

In light of the above, let’s take a look at how to choose the right asset for your portfolio. As with most things in life, there is no one-size-fits-all approach. Instead, you will need to determine what works best for you based on your unique situation.

One of the most important things which you must consider is the time horizon of your investment. Just like with most things in life, you will need to have a clear idea of how long you are going to be in possession of the investment. If you are planning on holding the investment for a short period of time, then you will need to opt for something which is quite stable. In times of uncertainty, you can opt for a cash position or an intermediate-term bond position.

The level of risk you are willing to endure depends on your goals as well. If you are looking for long-term growth then you will need to consider taking on more risk by investing in stocks and bonds. Alternatively, if you are aiming for quick and easy gains then you can opt for safer ventures such as cash or a short-term bond instrument.

One of the most important things which you must bear in mind is how much you are going to need your capital momentarily. If you need the money quickly consider opting for traditional investments such as stocks and bonds. In times of uncertainty, cash is often the best choice due to its short-term nature. Naturally, the opposite is true if you wish to be long-term invested or wish to take on more risk.

Once you have chosen your chosen asset, the next step is to create a proper plan for investing. Just like with most things in life, creating and following a proper plan can make all the difference in successfully investing your money.