Building an investment portfolio is critical to growing your wealth. This Wealth With Sophia column looks at how to get started
As women, we often hold more of our wealth in cash than men, which can limit our ability to grow our wealth over the long term. Keeping your money in a savings account at a bank may be a safe option, but often it does not earn a lot of interest compared to other investment options, which have the potential to generate a larger return. With the right research, knowledge and a well-thought-out plan, you can create an investment portfolio that helps you achieve your financial goals.
Before crafting an investment portfolio, it's crucial to identify what you want to achieve so that your investment portfolio can support those goals. Here are the initial steps to take before starting to invest:
- Think about the goals you want to achieve and why. These can include both short and long term goals, from planning a holiday to saving for retirement, buying a home or starting a business
- Make sure your financial basics are in place. These include creating a budget, setting up your emergency fund, paying off any debt and starting to save
- Determine your risk tolerance when investing: is it conservative, moderate or aggressive? Key factors to consider include your age, financial goals, investment horizon and income. The key here is to invest but also understand your risk tolerance so you can sleep at night and not worry about your investments
- Do your research and learn about different investment opportunities to help you set up your investment portfolio
- Be consistent in your approach and monitor your investment portfolio against any changes in your financial situation or goals
When building your investment portfolio there are various investment options available, each with its own benefits and risks. Understanding the different options will help you make informed decisions about what type of portfolio you want. Here are some examples of the type of investments you can start looking into:
Stocks
We are all familiar with the stock markets and its stocks, which represent ownership in a company. When you purchase a stock, you become a partial owner or shareholder of the company and are entitled to a portion of its profits, which are paid out as dividends. Stocks can be a high-risk, high-reward investment, but their value can also fluctuate greatly based on the performance of the company and the stock market.
Bonds
Bonds are debt securities issued by companies, governments and other public authorities or supranational institutions (one example would be The World Bank). When you purchase a bond, you are lending money to the issuer in exchange for periodic interest payments. Bonds are generally considered to be a lower-risk investment than stocks, but they typically offer lower returns.
Mutual funds and ETFs
Mutual funds and Exchange-Traded Funds (ETFs) are investment vehicles that pool money from many individuals to purchase a diversified portfolio of stocks, bonds and other securities. They offer the benefits of higher diversification and professional management making them a good choice for beginners or those who want a simple, low-maintenance investment option with lower risk. This is compared to investments into stocks which could have a higher risk due to less diversification. Your investment preference will be driven by factors including your financial goals and risk tolerance.
Alternatives
An alternative is an investment that doesn’t fall under equities (stocks), bonds or cash. Some may involve a more hands-on approach and a higher level of research. Angel investments, for example, are investments into early-stage companies before they secure capital from institutional investors such as venture capital firms. Real estate and commodities such as metal, energy and agricultural goods are also considered alternative investments.
Real estate
Real estate can be a valuable addition to an investment portfolio, and can include investing in rental or commercial properties, or in Real Estate Investment Trusts (REITs). Real estate can offer the potential for stable, long-term returns, but it also involves significant upfront costs and ongoing management responsibilities.
Cryptocurrency
Cryptocurrencies are a relatively new and highly speculative investment option. These digital currencies use encryption techniques to secure transactions and control the creation of new units, and while they have the potential to generate high returns, they also come with a high level of risk. Before investing in cryptocurrencies, it's crucial to do thorough research and assess your risk tolerance.
With an eye on your financial future, developing an investment portfolio to meet your life and financial goals is a powerful way to grow wealth. By developing an investment plan with a thorough understanding of the different types of investments available, women can take control of their financial futures and achieve their goals. Remember that having more money means more choices in life to do the things that you want. So, start talking about your investments and take action to make your money work for you.
Nicole is a co-founder of Sophia. She is also the founder of Next Chapter Raise, Asia’s leading fundraising and education platform for female founders. Nicole is a frequent guest on The Money Makers podcast, which interviews inspiring women in finance and female founders, and co-host of Raise the Bar podcast, which interviews female investors and founders.
This article is part of Front & Female’s Wealth With Sophia series, a collaboration with Sophia, a financial education platform built by women for women, to open up the conversation about money and help drive female financial literacy. The online series covers all things money and investing to enable women to gain the confidence to take control of their wealth creation.