How is an investment portfolio constructed? Part 3
At this point in the narrative, we already know a few things about putting together investment portfolios. Building an investment portfolio involves understanding the client's objectives, the risks they wish to take or not take to achieve those objectives, the type and amount of investments that might satisfy those objectives. Then, with all these constraints, assembling a balanced, dynamic and diverse portfolio. And as much and more important, to follow it closely, so that, in the face of changing circumstances, it meets the objectives and constraints that inspired it.
Having understood the client's objectives and their risk/return profile and their wealth and lifestyle constraints, we can begin by drawing the plane. The first thing is to determine what asset classes can be considered in the portfolio. The typical division is between investments and debt instruments and equity instruments.
Debt instruments include bank deposits, government bonds, corporate bonds and debentures, and very short-term government or corporate bonds. In these assets, the investment produces a certain return, usually fixed in most of the instruments, which is why they are known as fixed income securities. These returns are an obligation of the issuer, as is returning the invested capital.
The second asset class is property, equity investments such as stocks and shares in companies and a whole family of securities whose performance is linked to growth and profitability of investments. The returns are variable and uncertain and usually do not obligate the issuer to return the investor's investment, they are known as variable income securities.
The inherent characteristics of these asset classes is that they have different investment risks and generate different return profiles, thus satisfying investment objectives in more than one way. In fact, many portfolios are a combination of fixed income and equity securities. And hence, their design and assembly seek, in the combination, the best risk-return for the client. But this topic is the subject of a future article.
