The most important principles of investment portfolios – and how to put together your personal portfolio in 6 steps.
The Essentials in Brief
- A portfolio describes the sum of all of its different investments, from shares to real estate funds to ETFs.
- Portfolios are usually compiled in such a way that they are the individual preferences of the investor: in the corresponding – therefore (almost) all portfolios are different.
- In advance, you should therefore know what conditions your investment should meet – e.g. whether long-term and low-risk or with a focus on a high return.
- In order to reduce the risks of individual investments, it is worth spreading your system via different systems of different asset classes.
- Your portfolio should reflect: If you have big changes, you should also check your investments and, if necessary, adjust.
The “small-against-large” story of the Gamestop shares or the tumult about the prices of cryptocurrency Bitcoin have shown how socially suitable the topic has now become. Young adults in particular are increasingly concerned with their own finances and different investment opportunities.
This an exciting development, because the earlier you deal with investments, the more options are available for your own long-term asset planning. So that you can participate and get involved in the financial market successfully, a carefully structured portfolio is essential.
Long-term asset structure depends on both your individually set goals and ensuring that you are coherent for you from security, profitability, and liquidity.
This varies (almost) all portfolios because they are adapted to the individual needs and demands of investors: inside. Here I show you in 6 steps how you can create your individual portfolio and what is important.
What is a portfolio?
We should clarify this question before we go into detail. An investment portfolio is a collection of assets and can contain a wide variety of systems such as stocks, bonds, or funds. These systems are usually managed via one or more special custody accounts, which usually also process the purchase and sale.
The different types of systems belong to different asset classes: In order to be able to assign them to a certain class, different criteria come into play, such as risk, term, or stability. Portfolios are usually structured in such a way that they combine different asset classes.
On the whole, a well-positioned investment portfolio is about creating a balance between different products and asset classes.
Expert values such as real estate systems are usually subject to very low fluctuations, so they can give the portfolio stability. Shares as pure securities plants are subject to stronger fluctuations but offer the chance of more return.
In addition, thematic areas can be recorded if they are underrepresented in the portfolio strategy for the request for investors, such as investments in renewable energies.
Step 1: The investment goal – what do you want to achieve?
If you think about building a portfolio, you may already have an idea of which goal you are pursuing. Whether you build your private assets, provide for age or children, or want to fulfill a unique wish, for example, your home or a car – the more specifically the idea of your investment goal is, the more precisely your portfolio can be adjusted to you so They can create their money meaningfully.
Your goals are decisive for the size of your system, possible savings rates, investment time, and risks associated with it.
Step 2: Risk tolerance – what risk do you want to take?
The next step on the way to your portfolio is based on your own very personal assessment: How much risk can I tolerate and what is too much for me? The question of risk is always accompanied by the question of the possible return, i.e. winning your systems.
These two factors go hand in hand – if one rises, the other also increases. However, it should be noted that the chance of a three percent higher return does not mean a three percent higher risk, but also a total failure.
In principle, risks can never be completely avoided. But they can adapt them to their individual situation and their lifestyle. A young person, for example, is more able to weigh stocks in his portfolio strategy in order to achieve higher returns over the decades. He has the opportunity to sit out economic fluctuations, accept short-term losses, and wait for a new upswing.
But if someone is about to retire, he should focus on securing his assets and thus rely on more solid systems. Someone who wants to create money for his children will probably not play but rather rely on preservation and stability.
In any case, if you are dependent on a certain amount in the foreseeable future, you should avoid risking your assets for high returns, but increasingly relying on value-stable systems.
Step 3: Investment horizon – how long do you want to invest?
The duration of your investment also depends on the goal you pursue. The investment period has a major impact on the type of their system, on their possible profit, and thus also on the associated risks, because they differ differently depending on the investment strategy.
In addition, you should think about whether or how long you can refrain from accessing your invested capital. Because the deadlines on the minimum husbandry and the return of systems also differ from each other.
With regard to the duration of the investment horizon, a distinction is made between three types in principle:
1. Short-term investment horizon (1-3 years)
This rather short investment time is often used for investors: in their later years, which would like to prepare for their retirement and want to secure them. But this investment horizon also makes sense for inexperienced or risk-free investors: who want to continue to be able to access their money at short notice.
Because this is about security and availability; A high return first plays a subordinate role. Despite the hardly any interest, you can definitely park in a call money account if you need this money at short notice – the so-called “iron reserve” if the washing machine breaks.
However, if you want to achieve high returns with a short-term system, you can quickly burn your fingers: in such periods, speculative stocks or cryptocurrencies are often traded, which quickly achieve high profits but can just crash again just as quickly. Therefore, you should only think of such projects for your portfolio strategy if you are really familiar with them and are available to you with extensive financial resources.
2. Medium-term investment horizon (3-10 years)
With a medium-term investment horizon of around 3 to 10 years, you have enough time and financial security so that you do not have to access the money you have invested at short notice. Here you can start adding some more risky systems to your stable investment products (e.g. real estate investments), such as stocks or ETFs.
The possible returns are usually higher in these investment products, the associated risks can be partially absorbed by the solid systems.
3. Long-term investment horizon (10+ years)
If you want to invest your money for 10 years or more, you are open to some options. On the one hand, it is worth continuously padding your retirement provision over such a long period of time; On the other hand, you may be willing to take major risks for larger profits.
Or you just want to build up beautiful assets for many years. Here you need a lot of time and risk tolerance to wait for payouts or to compensate for losses after risky investments. Here, too, the basis of the portfolio consists of long -term value -stable systems, while a more significant part can be created in more risky products with a potentially high return.
What is important here is the word “can”: If you have found in step 2 risk tolerance that this is not up and down the stock exchange, then simply create your own portfolio around solid, low-risk products such as open real estate funds.
Step 4: Which funds are available to you?
Before you can tackle the structure and distribution of your portfolio, you should make a realistic assessment of your finances: Which amount is currently available to you, and how much of this can you use for your investment? Do you have a month plus of your income?
This information is important for you so that you can decide which investment amount is suitable for you and in what way you want to invest your money. In any case, you should be secured with the “Iron Reserve”, so that irregular costs, for example, a new washing machine or the repair of your car, can be covered. If you also have a larger amount, a one-time investment with a higher sum is worthwhile for you.
As a rule of thumb, it is recommended: at least 10 percent, better 20 percent of gross income, you should save every month. But before you start investing, you should pay back any existing installment loans and Co. These interests usually eat every return.
Step 5: Create your own portfolio
So far, we have dealt with the necessary conditions that precede the structure of your portfolio. So that you can now better assess which investment goal you are pursuing, how risky you are, which investment horizon you see, and which amounts for your system are considered, we are now the most important and most exciting point: creating your own portfolio.
Here I will now introduce you to the various asset classes so that you can assess which of these classes are for your personal demands and requirements.
At a glance at an overview: the most important thing you need to know about the division of your portfolio.
The five categories of asset classes
Includes mean savings formats such as overnight money or fixed deposits, in which the investment amount is created on a special daily or fixed deposit account. You can access it either daily or in the event of a fixed deposit account after a previously defined period of time. These forms of investment usually result in safe, but low returns (or in the case called interest).
They are currently practically at zero. At this level, it is only “certain” that you save through the inflation rate like an ice block. However, the deposit guarantee fund also secures your system up to 100,000 euros per insurance in the event of a bank defeat.
2. Real estate:
Real estate is considered a comparatively stable and crisis-proof investment. If you have a property yourself, you can expect a reliable increase in value in most places.
The greatest risk of possession of your own property is the concentration of a large number of resources and financial resources in a single property. In addition, real assets such as real estate and regular costs are accompanied by the necessary repairs or ongoing additional costs. Another option to invest your capital in real estate consists of investment in real estate funds.
Open real estate funds offer a convenient and low-risk form of securities. Your money will be invested in the fund’s own real estate stock; The return results from regular yields such as rental income or from profits in the event of a sale. A well-positioned open real estate fund distributes its properties across various locations, types of use, and tenant categories to increase its stability.
The so-called crowdfunding is a third option in real estate; Here a group of investors comes together to finance a real estate project together. The returns provided are usually higher in this type of system, but also with significantly higher risks up to the total failure. The same applies to closed real estate funds, which you do not confuse with the open and the more experienced investors are an option.
The largest investment class form securities: this includes stocks, bonds, (stock) funds, ETFs, and certificates. At this point we go back to the individual securities:
4. Raw materials
Raw materials form a heterogeneous asset class, which contains a wide variety of natural substances such as oil, iron ore, copper, or even agricultural raw materials such as grain. Precious metals such as gold, silver, or platinum are also included.
In contrast to the other asset classes, raw materials themselves do not result in any independent profits or dividends. Raw materials as a value system are based on supply and demand and can prove to be stable, but also be dependent on geopolitics or the climate.
5. Alternative investments
Under alternative investments, various types of investment, are often intended for exclusive, mostly wealthy investor groups. This includes, for example, closed real estate funds, private equity investments, or hedge funds.
There are entry options from 10,000 to 20,000 euros, but I first advise beginners from such investments in their first years of investor. Often enough, lucrative investments are only available from € 200,000 for an exclusive circle.
Diversification is the be -and end -of a successful portfolio strategy
The concept of diversification is essential when we talk about portfolio structure. This means a technology that can be used to reduce risks by distributing investments through different categories such as asset classes, industries, locations, etc.
The goal is to reconcile returns and security as possible by investing in different areas, each of which reacts differently to the same event.
An example: During the Corona crisis, industries such as the gastronomy or hotel industry were affected by the loss. At the same time, however, tech companies such as Zoom or mail order companies such as Amazon achieved new maximum profits. Therefore, the broad spread of an investment portfolio is important in order to avoid so-called “clumping risks”.
All investment experts agree: Diversification is a decisive factor in order to able to achieve their financial goals in the long term and at the same time minimize the risks. Here I present some different strategies for your diversified portfolio:
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1. Diversification according to industries:
In addition to the basic portfolio layout across various industries, it is worth ensuring that you are at nicing that do not correlate with each other. Anyone who invested in gastronomy, tourism, and air traffic in the high phases of the Corona crisis had to accept considerable losses during this time. Therefore, it is worth taking a closer look at the various industries in which you can invest:
- Healthcare (pharmaceutical, medicine, etc.)
- Trade and consumption
- Technology / Biotechnology
- Automotive production
2. Geographical diversification:
Although globalization has already progressed well, it is still worth investing in the markets of different countries. For example, if the stock exchange courses develop to their disadvantage, shares in other countries can cushion the negative effect on the overall portfolio.
3. Diversification according to investment classes:
Different asset classes or asset classes react differently to concrete economic developments. With diversification after asset classes, you can protect your portfolio from strong fluctuations, because: If capital flows out of an investment class, it usually flows into another asset class.
As part of your portfolio structure, determine how you want to distribute your assets. This distribution to various investment classes – also called Asset Allocation – helps them to take their risk to take into account their risk of risk in their portfolio strategy. Here you can see an example of what such an asset allocation can look like:
On the pulse of time: diversify sustainably
It is no longer a secret that sustainability has now also arrived in the financial market. For many investors: Inside, it is no longer just a decisive factor to let your money work profitably, but also so that something good for nature or society. Many financial products or their providers have already recognized this new responsibility and have implemented it.
Products for sustainable investments are checked on the basis of appropriate (exclusion) criteria, for example through the ESG criteria: They rate a financial product or the company behind the aspects of the environment, social affairs, and corporate management. Hausinvest is An ESG pioneer in open real estate funds.
The so-called Impact Investing goes one step further: Here the financial return is directly combined with positive social effects. This means that this investment approach acts actively, is solution-oriented, and is demonstrable. An impact fund, such as Klimavest from Commerz Real, thus meets the need for a sustainable system and at the same time enables to invest in renewable energies, which gives a portfolio additional diversification.
Fund: diversified by house
It is in the nature of funds to spread broadly and invest in several assets simultaneously. This opens up private investors: with the opportunity to invest in a large number of assets via a single system.
So if you create five funds, each invested in ten assets, then you will have a system of 50 assets.
This possibility of widespread is ideal for classic funds and ETFs, i.e. stock markets traded. Our open real estate fund Hausinvest invests the capital of our investors: inside over 150 commercial properties and thus has a solid and widespread about various nations, industries, and types of use.
Market timing: When does it make sense to invest?
Private investors often want to wait until the courses on the market fall and the shares are correspondingly cheap until they dare to create their own portfolio. So it often happens that the time of investment is repeatedly postponed. Because in order to be able to assess the market exactly and to be able to adapt the optimal time of the investment, a lot of experience and knowledge in the field of capital markets is needed.
Therefore, I advise you: It is not the perfect time, but for time. Instead of waiting for a chance for years, they approach the market in small steps. You don’t have to start with all your savings right from the start. But with smaller amounts with which you gain initial experiences and successes, you can gradually build your assets and learn to better understand the market. Therefore, the optimal time is: now.
Step 6: Reference your portfolio layout
As soon as you have successfully built up your portfolio, it is important to analyze it regularly and weigh it again. This allows you to take current course developments into account and include them in your portfolio. In addition, you can also take suitable steps in the event that your personal situation changes in order to re-adapt your portfolio according to your circumstances.
In the future, your portfolio will continue to reflect your current financial situation, your willingness to take risks or future goals that you may have set up. For example, if your risk tolerance has dropped, you have the option of reducing the number of shares held. Or maybe you feel more expert and therefore more confident over time so you want to invest a small part of your assets in more risky products.
In order to adapt to the portfolio layout of your situation well, you determine which of your positions are over- or underweight. If you keep 30 % of your current assets in shares, but your strategy provides only 15 %, part of your capital should be transferred from this investment class to another class.
Your portfolio, your rules
In six steps I showed you what is important when creating your own investment portfolio. Above all, you should always keep an eye on yourself and your situation, because there is no perfect portfolio that works equally well for every investor. The optimal portfolio for you is the one that is tailored to you and thus also reflects your wishes regarding returns, risks, and personal requirements.
Whether with a one-time system or a savings plan from 10 euros per month, such as at Hausinvest: It is important that you start. For example, you can read in the following post how you start, for example, if you want to invest 20,000 euros.
And now I wish you a lot of success and fun building your personal portfolio!