Investment Portfolio Strategies
How can I create an investment portfolio using proven strategies? The best way to determine what assets should be added to your portfolio is to understand the different methodologies that are used to build a proper mix of investments.
An equally-weighted portfolio uses the concept of placing the exact same amount of money into each type of security in which one invests. Basically, if you have $10,000 to invest, you can balance equally between stocks and bonds, by putting $5,000 in each.
Using the concept of a capitalization-weighted portfolio, the components of the mix are different, but weighted. Basically, the amount of stocks one has in the portfolio could be much larger than the bonds, however, the value of the bonds are financially equal or worth more than the stocks.
Price-weighted portfolio management uses the methodology of choosing stocks with a larger influence on the greater portfolio than others. All stocks are included, but some have a higher price than others, meaning they impact the overall portfolio with a greater weight than others when they fluctuate in price.
The most prevalent theory in establishing an investment portfolio, however, is the optimal portfolio method. This uses the general principles of the modern portfolio theory, in which investors add assets to the mix that offer the highest return possible, but the lowest risk. Using the risk-return spectrum, investors can find a good mix of assets that provide adequate gains while mitigating losses.