Investors often go crazy about diversification, which simply means they are not putting all their investments in one basket.
They do this to control and mitigate their risks. Generally, proper diversification results in better returns on investments.
However, diversified portfolios aren’t one and the same. There are different types of portfolios for different investors. Here are the main types of them.
Defensive stocks do not carry high risks. They are also fairly immune to broad market movements. Meanwhile, cyclical stocks refer to those most vulnerable to the underlying economic and business cycle.
During recessionary times, companies that make the basic necessities and utilities usually fare better than those that are serving fads and luxuries.
No matter how bad the economy is performing, these defensive companies will stand pat and survive. In effect, these stocks offer another layer of protection against catastrophic events.
Many of these stocks also often offer dividends, which help you minimize the capital losses you may incur.
Meanwhile, an income portfolio aims to make money through dividends or any other types of income distributions to shareholders.
These companies are similar to defensive ones, but they offer somewhat higher yields. An income portfolio can be expected to generate some positive cash flow.
You can try real estate investment funds (REITs) and master limited partnerships as good sources of income-giving investments.
Such companies usually give a huge part of their income to their shareholders. They do that for a great tax status.
You can also use an income portfolio to complement your salary or your retirement income. Find stocks that have fallen out of favor but still have dividend policy.
An aggressive portfolio invests in stocks that have high-risk-high-reward tradeoffs. These stocks usually have high beta or sensitivity to the overall market.
Most companies that have aggressive stocks are usually in the first stages of their growth and have some distinct value proposition.
Creating an aggressive portfolio needs you to be willing to find such companies since most of them aren’t typically household names.
The most common sector to find these stocks is the tech sector. Risk management also becomes very important when creating and maintaining an aggressive portfolio.
A speculative portfolio carries the highest risk among any other portfolio type. Many finance experts advise to keep your investible assets funding speculative portfolio to 10% max.
Speculative investing can be done through initial public offerings (IPO) or stocks that are seen to be takeover targets.
Technology firms that are currently researching a breakthrough product could fall into this category, as well as junior oil company that is releasing its initial production.
Building a hybrid portfolio means you pick other investments like bonds, commodities, real estate, and even art.
Using a hybrid portfolio lets you adopt a more flexible approach. Generally, this kind of portfolio will contain blue-chip stocks and some high-grade government or corporate bonds.
Moreover, a hybrid portfolio would allow you to invest in a mix of stocks and bonds and relatively fixed proportions.
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