Different types of investment portfolios
A portfolio represents a group of investments in a company. Even in theory it’s impossible to construct a one-sided portfolio that is solely based on one financial instrument/investment, given that all firms are required capital (money) and head office (real estate) for registration.
That being said, a portfolio displays the collection of different investments, which reflects the company’s position on risks, returns, and general idea of managing a firm. There are numerous types of investment portfolios, most of which can fall under one of the following categories – aggressive, defensive, income, speculative, and hybrid. Today we’ll talk more about each, so let’s start from the top.
1. Aggressive portfolio
Aggressive portfolio is all about rapid growth. Many brand owners have realized that in order to be noticed and ultimately recognized among millions of contemporaries, the brand needs to jump at every opportunity the market serves on its table.
Although it’s based on a high risk-high return concept, this portfolio type relies on market research and insight as much as any other. However, information is sometimes not ripe, and sometimes unavailable. Aggressive portfolio companies actively search for startups and brands that have just emerged (but show potential). Rapid expansion also results in a more diversified portfolio, leveraging a portion of the risk.
2. Defensive portfolio
The main premise of Defensive portfolios is the ability to make educated long-term decisions and investments and evading as many risky ventures as possible. It’s the polar opposite of the Aggressive portfolio in that it is passive and bent on eliminating weak links in investing strategies, implementing tried and tested approaches and techniques.
Defensive portfolios, just like Aggressive ones, are usually designed by high-profile financial and investing advisors. The Motley Fool, for instance, offers a unique options-based system that can help young brands and startups make educated financial decisions with minimal skill and knowledge.
Additionally, defensive portfolios aim to minimize losses. Sustainability is one of the main characteristics of this portfolio, which is essential on volatile markets and uncharted financial waters.
3. Income portfolio
It wouldn’t be completely wrong to mention Income and Defensive portfolios under the same breath, as they share more similarities than differences between each other. However, while defensive portfolios are based on slow-but-steady growth, the goal of an income portfolio is to laser-focus on various investments that generate cash through stakeholder distributions, such as REITs or master-limited memberships.
The income-generating capabilities of income portfolios heavily rely on the particularities of the current economic climate. When stocks held by a company perform better than anticipated, more income is generated while at the same time master-limited partnerships could help the brand get a substantial tax return, resulting in a small fortune worth of pure income.
On another hand, real-estate investment trusts, often referred to as REITs, are more reactive to the changes of current economic ebbs and flows, which could potentially generate tremendous amounts of income at one point, only to burden the company with even higher debts the following year.
Companies that opt for Income portfolios can optimize their income by investing in low-profile stocks with high dividends, ensuring profitable tax returns at minimal dispersal of income. Industries such as non-residential building construction, diagnostic laboratories, florist, and directory publishing industries can flourish the most due to their lethargic growth rate.
4. Speculative portfolio
A speculative portfolio is the extreme version of the Aggressive portfolio, being characterized by a drastically higher margin of risk, but also offering the highest potential for outrageous returns.
As its name implies, the main premise of this portfolio type is speculation. Companies base their financial assets in high-risk ventures, stocks, or bonds with minimal diversity, anticipating that their efforts will pay ten, twenty, or hundred-fold.
Unlike the concept of the Aggressive Portfolio, companies that utilize speculative portfolios typically have an ‘ace’ up their sleeve, which could be a one-of-a-kind product that is unlike anything the current market has to offer, a quantum-leap type of technology, or a legitimate alternative to a tremendously popular service or product.
One of the schoolbook examples of a Speculative portfolio would be a lumbering stock of Bitcoin upon the crypto’s initial release. Hindsight would propel us to label such an investment today as one of the most beneficial moves in the world of investing, although, in reality, no one could have predicted it in 2009.
5. Hybrid portfolio
A hybrid portfolio is any portfolio that borrows the elements of the aforementioned established types. It can be graphically explained as a roulette table and a player that bets on multiple numbers while also setting a handful of chips on a color, on a zero, and on odd/even sections.
Investing, or in this case, ‘betting’ on multiple investing ventures results in maximal diversification. The proportion of diversification is correlated to risk tolerance and management, meaning that insightful decisions and knowledge of the market are necessities. One of the main characteristics of a hybrid portfolio is its flexibility – the ability to consolidate at the expense of diversification amid failed ventures, and vice versa.
