Hey, welcome back... So far we have seen three very different strategies for building Portfolios- Defensive, Fixed Income and Aggressive.(Read more about Defensive Portfolio and Income & Aggressive Portfolio .) So, two of the most fascinating ways to diversify your assets are Speculative portfolio and Hybrid Portfolio.
The Speculative way of doing it: Speculative Portfolio
Have you ever played a gamble? If yes, it's fine and if no, then it's fine too. Don't worry I am going to talk about gambling here. But when it comes to the part of Speculative Portfolio, it comes closest to a pure gamble. As an investor, you buy speculative stocks for spectacular gains rather than normal ones. However, it presents more risk than other type of portfolio.
Where to invest?
Examples of speculative 'plays' include Initial Public Offerings(IPOs), technology or health care firms that are working or researching on a new product or a breakthrough technology, a new oil company yet to release its first production results. Another classic example of speculative play is to make an investment decision based upon the rumor that the company is subject to a takeover. Some say that the leveraged ETFs in today's market represent speculation also.
The Highs and Lows of it
A speculative portfolio is the riskiest way of investing money. But with great risks comes greater returns. Again, these types of investments are alluring: if you pick the right stock your returns could go sky-high, but the downfalls are also scary.
What to do then?
Speculative portfolios are the ones that require the most homework. Before investing in any stocks it is essential to examine the management quality of the firm, but this becomes even more important in the speculative end of the town. One needs to be aware of the happenings about the company and confident that the management can carry out the targeted plan of action. The one thing every investor should remember is that speculative stocks are typically trades rather than the classic 'buy and hold' investment. The rule of thumb is to 'buy low sell high'. It is advisable that one should invest a maximum of 10% of assets to fund a speculative portfolio. All that being said, if you call the right shot, you could end up with returns that dwarf those of your other investments.
Hybrid Portfolio- Best of Both Worlds!!!
Yes, you heard it right. The main objective of these funds is to offer you the benefits of both- equity and debt. Hybrid funds do well in case the markets are going down, as they have the cushion of debt. So, they are better equipped in handling the ups and downs of the market. However, in case of rising markets, they may not deliver in comparison to their (100%) equity counterparts.
Allocating it properly
Basically, a hybrid portfolio would include a mix of stocks and bonds in a relatively fixed allocation proportions. This type of approach offers diversification benefits across different asset classes, since equities and fixed income securities have negative correlation with one another. It can also consist a mix of blue chip stocks and bonds in a rigid allocation proportions. Generally, allocation is done in 70/30 ratio, 70% exposure to equity and 30% to debt.
Making it work for you
There is a lot of flexibility in the hybrid portfolio approach. It means venturing into other investments, such as bonds, real estate, commodities. REITs and MLPs can also be a part of your investment allocation. The principle behind this approach is to allocate your assets in various ways so that they have negative correlation. For example, government bonds tend to offer higher yields during recession times and this balances out the dips that the stock market takes during these periods.
Having laid out all the strategies on how to invest your assets, investors should consider in investing in all types of portfolio in a variety of ways and to see which works for them best. This will not only increase your returns but also cover you for the risks associated with the market to a great extent. Despite the extra effort required for this, it will boost your confidence as an investor and devising a strategy of your own for the long run.
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