Why should you build an investment portfolio? Essential asset allocation tips for beginners

Investment Portfolio is not just a privilege of the wealthy. No matter how much capital you have, understanding how to allocate financial assets is the first step toward financial freedom. Today, let’s discuss the core logic and practical methods of building an investment Portfolio.

What is an Investment Portfolio?

A Portfolio (investment portfolio) simply refers to a collection of various financial assets held in certain proportions. These assets include stocks, funds, bonds, bank deposits, and even cryptocurrencies.

It might sound abstract at first, but think of it this way: if you invest all your money in a single stock, and that stock crashes, you could lose everything. But if you diversify your investments across stocks, funds, bonds, and other assets, even if one performs poorly, others might still grow, greatly reducing your overall loss.

Simply put: a Portfolio is designed to pursue returns while keeping risks within an acceptable range.

The three main factors influencing your Portfolio allocation

Risk preference determines asset proportions

Different people have vastly different attitudes toward risk. Some are naturally risk-takers, others prefer stability. Which one are you?

• Risk-loving: Willing to accept higher volatility for higher returns, typically allocating 50% stocks, 30% funds, 15% bonds, 5% bank deposits
• Risk-neutral: Seeking balance, allocating 35% stocks, 35% funds, 25% bonds, 5% bank deposits
• Risk-averse: Prioritizing capital preservation, allocating 20% stocks, 40% funds, 35% bonds, 5% bank deposits

Age is the invisible designer of your Portfolio

Your Portfolio at 28 should be completely different from at 65.

A 28-year-old working professional, even if they lose 30% once, still has over 30 years to recover through income. So, they can afford a more aggressive allocation. An elderly person at 65, retired and without active income, needs a more conservative approach.

The older you are, the higher the proportion of low-risk assets in your Portfolio. This is not about being conservative, but a rational choice based on life stage.

Market environment and asset characteristics cannot be ignored

Even within funds, differences are significant. Money market funds are low risk but offer lower returns, while index funds are the opposite.

Regional differences are also obvious. Emerging market stock index funds are riskier than those in developed markets. Why? Because emerging markets are more susceptible to geopolitical and economic policy changes, with companies often concentrated in resource and energy sectors, making them more volatile. Developed markets tend to be more diversified and resilient.

Data shows this clearly: from 2017 to 2020, emerging market ETFs (EEM.US) outperformed Eurozone ETFs (EZU). But when markets turn, emerging markets also fall harder—between 2020-2022, EEM dropped 15.5%, while EZU only fell 5.8%.

How to build a Portfolio that suits you?

Step 1: Recognize your risk tolerance

Take an online risk assessment test, answer a series of questions, and determine whether you are risk-loving, neutral, or risk-averse. This is not trivial; it’s the foundation for building your Portfolio.

Step 2: Clarify your investment goals

Your goals determine how you allocate assets:

Wealth growth: Set specific targets, like doubling in 5 years. Suitable for young people willing to take risks.

Wealth preservation: Aim to beat inflation without seeking huge profits. Suitable for those who have accumulated some wealth or are retired.

Steady cash flow: Under the premise of capital preservation, maintain liquidity. Suitable for entrepreneurs or those who frequently need cash.

Step 3: Choose specific asset classes

Have a basic understanding of stocks, funds, bonds, bank deposits, etc. Know their risk-return profiles, liquidity, volatility, and other characteristics.

Step 4: Start allocating

For example, if you are a 28-year-old professional with NT$1 million, risk-loving, aiming to double in 5 years:

You might allocate: NT$500,000 (50%) in stocks, NT$300,000 (30%) in funds, NT$100,000 (10%) in bank deposits, and keep NT$100,000 (10%) as emergency fund.

Key reminder: Always reserve 10-15% of your funds for emergencies. Many beginners go all-in after building their Portfolio, but when urgent situations arise, they have no liquidity and are forced to sell at a loss—this is a big mistake.

How to allocate different assets within your Portfolio?

If you want to refine within a single asset class, such as only investing in funds, you can adjust based on risk preference:

Risk-loving: 60% stock funds, 30% bond funds, 10% commodities funds

Risk-neutral: 40% stock funds, 40% bond funds, 20% commodities funds

Risk-averse: 20% stock funds, 60% bond funds, 20% commodities funds

The key point: Never put all your eggs in one basket. Going all-in on one asset is a major taboo in Portfolio allocation.

Where does risk come from? How to respond?

Even with a carefully designed Portfolio, risks still exist. They may stem from market fluctuations, industry changes, inflation, interest rate shifts, and more. More importantly, many losses come from the investor’s own mindset and decisions.

Practical risk management methods:

Set stop-loss and take-profit points: Predefine target prices and loss thresholds; execute when reached. Don’t change your plan out of luck.

Diversify: Increase investments in different types and regions, so a collapse in one market won’t wipe out your entire Portfolio.

Review regularly: Check your Portfolio quarterly or semi-annually to see if each asset still aligns with your goals and whether adjustments are needed.

Control emotions: Black swan events can be frightening, and short-term volatility can tempt impulsive decisions. Investors lacking emotional discipline often make poor choices at the worst times. Stay calm and stick to your long-term plan.

Common questions for beginners

Q: Can small amounts of capital be allocated to a Portfolio?
Absolutely. As long as it meets the minimum investment thresholds for each asset. In Taiwan, some funds require only NT$3,000 minimum, and CFDs have even lower barriers, making it suitable for small investors to start small.

Q: Once I have a Portfolio, can I just sit back and earn without losing?
No. A Portfolio balances risk and return but doesn’t guarantee growth. Wealth accumulation depends on market conditions and the performance of your chosen assets. Regular monitoring and adjustments are necessary. When selecting assets initially, have a basic outlook on their prospects.

Q: I don’t know how to allocate at all.
You can refer to portfolios with similar investment goals or consult a financial advisor. Don’t guess blindly; professional advice can save you many detours.

Q: After building a Portfolio, can I just leave it alone?
Absolutely not. Market conditions change, and assets that perform well may suddenly underperform. Regular review and adjustments are essential based on actual circumstances.

Final words

The core of investment Portfolio is: Within your risk tolerance, pursue maximum returns. It’s not just an investment strategy but a philosophy of financial management.

Building a solid and flexible Portfolio requires not only knowledge but also emotional discipline. Start with understanding yourself, choose appropriate asset allocations, review regularly, and make adjustments. That way, your assets will grow steadily—like gaining weight through fitness—rather than experiencing wild fluctuations.