5 Types of Portfolio To Increase Your Returns: Part 2

 Hello friends. Last time we started off with the first of the five Portfolio types, namely, Defensive Portfolio(Read more about Defensive Portfolio). In this article, the main focus would be on the Aggressive Portfolio and the Income Portfolio.

Aggressive Portfolio:

As the name suggests, an Aggressive Portfolio consists of stocks with high risk/ high reward proposition. Stocks in these category have a high beta, which means they are very sensitive to the overall market. Higher beta stocks experience larger fluctuations relative to the market on a consistent basis. Suppose, your stock has a beta of 2.0, so it will typically move twice as much in either direction to the overall market. Hence they are considered to be high risk/ high reward investments. 

The majority of aggressive stocks are the companies in the early stages of their development and have a unique value proposition. This entails a very high degree of research, as these companies are, by their very nature, not very well known. Look online for the companies that have rapidly accelerating earnings growth. The most common sectors to scrutinize would be the technology sector but a company in any sector that is pursuing an aggressive growth strategy can be considered. As is evident, risk management becomes crucial when building and maintaining an aggressive portfolio. The key lies in employing a strategy of cutting the losses quickly and taking profits.

Who should invest

An aggressive portfolio is appropriate for an investor with a high risk tolerance and a time horizon longer than 10 years. Aggressive investors are willing to accept periods of extreme market volatility (ups and downs in account value) in exchange for the possibility of receiving high relative returns that outpace inflation by a wide margin.

Income Portfolio:

An Income Portfolio's mainly focus on making money through dividends or other types of distributions to stakeholders. While the underlying assets may go up or down in value, the prime focus is on the income derived from them, as they are not so volatile as the assets. These assets are more or less similar to defensive stocks, except that they offer higher yields. An income portfolio should generate positive cash flow. Assets that can be used in this type of portfolio include Real Estate Investment Trusts (REITs) and Master Limited Partnerships (MLPs). These companies return a great majority of their profits back to shareholders in order to minimise their tax liability. Other income based assets include Government and Corporate Bonds, which are effectively IOU notes issued by government and companies with a fixed interest rate attached to them. Also REITs are an easy way to invest in real estate without bothering to own real property. However, keep in mind, that these stocks are subjected to economic climate. During economic downturn, REITs can take a beating, as building and buying activity dries up.

An income portfolio can make for a stable accompaniment to most people's paycheck or other retirement income. Look out for stocks in slow growth industries that have fallen out of favor and have still maintained high dividend policy, as these offer the opportunity for capital growth as well as income. Utilities and other slow growth companies are an ideal place to start the search.

So far, we have seen three types of portfolios depending upon the investments in various sectors. The risks involved vary with the selection of stocks and the expected gains in the same proportion. The next article will conclude with the Speculative and Hybrid Portfolio.

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