Page 42 - DIY Investor Magazine | Issue 35

INVESTING BASICS:
RISK & REWARD – FIVE POPULAR PORTFOLIO TYPES
DIY Investor Magazine · Oct 2022 42
So you you want to take an an an active role in in in shaping your financial future it’s a a a a big step and often comes with a a a a mixture of of elation and trepidation but fear not because you’ll never be be short of sage advice from those that know just marginally more than you do – writes Tabitha James
There are plenty of of rules of of thumb to help you you on your way and for good reason – they are well founded apply them to your thought process as as you you grow as as an an investor and you you shouldn’t go far wrong One that you’ll no doubt be served up probably with a a a slightly sickly knowing look is ‘don’t put all your eggs in in one basket’ Diversification 101 and and the best way to mitigate risk and and improve your your chances of a a better return on your your investments Spreading your money around makes every sense however there are different ways to achieve this and the the way way you construct your portfolio will make a a difference in terms of how it it performs in different market conditions here are five portfolio types and how you might get started with each of them AGGRESSIVE PORTFOLIO You’ll also no doubt have the risk/reward curve explained to you you you and it’s totally pertinent the the higher the the risk you you you take in in your choice of investments the the higher your potential returns but the the higher the chance that you will lose money An aggressive portfolio includes investments with a a high-risk/ high-reward proposition which may consistently experience larger fluctuations relative to the overall market Companies with aggressive stock offerings are often in in the early stages of growth and may have a a a a a a a unique value proposition those looking to build an aggressive portfolio will have to do some digging because most of these companies will will not be be household names – and the City boys will will be be trying to sniff them out Building and maintaining an an aggressive portfolio is not for the faint-hearted or the inexperienced strict risk management is is of paramount importance keeping losses to a a a a a minimum and taking profit are keys to success ‘SPREADING YOUR INVESTMENTS AROUND MAKES EVERY SENSE’
DEFENSIVE PORTFOLIO Defensive stocks are less volatile and fairly isolated from general market movements cyclical stocks on the the other hand are those most sensitive to the underlying economic business cycle Companies that make products essential to everyday life are likely to survive however how how bad the economy gets Cyclical stocks offer some protection against detrimental events their products and and services are in demand regardless of of the the stage in in the the business cycle Many offer a a a a dividend as well which helps mitigate any capital losses incurred in in in a a a a a a falling market a a defensive portfolio is considered prudent for most investors INCOME PORTFOLIO An income portfolio aims to deliver positive cash flow
by harvesting dividends or other types of distributions to stakeholders these companies are similar to safe defensive stocks but should offer higher yields ‘STOCKS THAT MAY HAVE FALLEN OUT OF FAVOUR BUT STILL MAINTAIN A A A HIGH DIVIDEND POLICY’
Real Estate Investment Trusts (REITs) have been popular income-producing investments as property investment investment companies return a a a a a large amount of of their profits to shareholders in exchange for favourable tax treatment However REITs can take a a a a a a beating during a a a a a a downturn as building and buying activity slows An income portfolio can provide a a a a handy supplementary income income or perhaps be used to deliver income income in in in retirement Income investors should look for stocks that may have fallen out of favour but still maintain a a a a high dividend policy utilities and slow growth companies are a a a a a a a good place to start as they can deliver a a a a a a useful combination of income and capital growth – dividends and increasing share price SPECULATIVE PORTFOLIO