How To Build an Investment Portfolio: Beginner’s Guide

2026.02.27 2026.02.27
How To Build an Investment Portfolio From Scratch

Artem Parshinhttps://www.litefinance.org/blog/authors/artem-parshin/

Trading in financial markets typically begins with building an investment portfolio. Every investor eventually confronts the challenge of shaping it into a solid and well-balanced structure.

In today’s uncertain economic environment, many people face financial instability, which increases the need for additional sources of income. Passive investing has become one of the most accessible ways to achieve this. The first step is to set clear financial goals.

This article explains which assets to include in your portfolio to achieve stable returns with moderate risk, regardless of whether you are just starting out or already have investing experience.

Major Takeaways

What Is an Investment Portfolio?

An investment portfolio is a mix of different asset classes that an investor buys to make money. Basically, it means all the investments you make to earn a return.

An investment portfolio is more than just a collection of assets, as it is built around a clear strategy. The key idea is asset allocation: some investments are chosen to lower risk, while others aim to boost returns. As a result, losses in one part of the diversified portfolio can be balanced out by gains in another.

Types of Investment Portfolios

There are three main types of investment portfolios, which differ in terms of the investor’s goals.

1. Conservative portfolio. Its primary objective is to preserve capital and minimize risk. This type of investment portfolio is considered successful if its returns slightly exceed inflation, thereby maintaining purchasing power. Returns are typically low but stable, achieved through significant investments in reliable, low-risk instruments. A pension portfolio is a classic example of this approach.
2. Balanced portfolio. It is designed to provide steady returns higher than those of a conservative portfolio, while keeping risk at a moderate level. It combines stable, lower-risk assets with higher-growth investments to achieve a sensible balance between risk and return.
3. Aggressive portfolio. It aims for high returns. This type of portfolio includes riskier assets, often with a shorter investment horizon. While this approach can generate substantial profits quickly, it also carries a much higher risk of loss. Many newcomers to the stock market choose this strategy without fully realizing the level of risk involved.

Financial Goals And Investment Timelines

Before you start investing, take time to define your financial goals and when you hope to achieve them. Knowing this will help you choose the right strategy, risk level, and assets. When you are clear on your goals, you can develop a portfolio that truly fits your financial needs and supports your plans.

• Financial goals. The first step in investing is understanding your motivation. The reason someone chooses to invest in assets is known as a financial goal. Unlike a simple wish, a financial goal involves a clear plan. As an investor, you identify the amount needed, set a rough timeline, and outline the steps to reach your investment objective.
• Investment timelines. This refers to the period you set aside to invest in order to reach a specific goal. People often mix up the investment timeline with the investment horizon. The investment timeline is about how long it takes to achieve a particular objective, while the investment horizon describes the broader span during which you remain active in the market.

Asset Classes For Building An Investment Portfolio

To build a good investment portfolio, investors can include different types of assets, especially those that are weakly correlated. Combining such assets helps reduce risk and makes the overall performance more stable over time.

The choice of assets depends on investment goals, investment timelines, financial capacity, and risk tolerance.

The financial market offers a variety of instruments such as stocks, bonds, mutual funds, cash, real estate, precious metals, and other assets.

Stocks In Your Investment Portfolio

Despite the abundance of investment instruments, stocks remain one of the most popular asset classes.

A stock is a type of equity security that represents ownership in a company. It gives shareholders the right to receive a portion of the company's profits, usually in the form of dividends, and to take part in corporate decisions, such as voting at shareholder meetings.

An investment portfolio usually consists of several types of stocks:

1. Blue chips. These are shares of large, established companies with high liquidity. They are actively bought and sold on the stock exchange. These companies typically have a long track record.
2. Dividend stocks. These are securities of companies that regularly pay dividends. Such stocks are suitable for investors looking for a regular cash flow.
3. Growth stocks. These are shares of companies that have high upside potential. This category often includes tech companies and businesses in fast-growing industries.
4. Cyclical stocks. These are shares of companies whose performance is heavily influenced by the state of the economy. Their value can surge during economic booms and fall during downturns.

Bonds And Fixed Income Securities

Bonds are often chosen for conservative portfolios, where the main objective is to preserve capital.

A bond is a type of debt security. When you buy a bond, you are essentially lending money to the issuer, such as a government, municipality, or company. In return, the issuer agrees to repay the full amount on a specified date and to pay interest for the use of the funds. In simple terms, a bond is a promissory note with clearly defined terms and conditions.

Bonds can be categorized based on several characteristics.

1. By issuer type:

• Government bonds — issued by national governments.
• Municipal bonds — issued by local authorities or municipalities.
• Corporate bonds — issued by companies.
• Financial institution bonds — issued by banks, broker-dealers, and investment companies, which have complex payment terms.

2. By method of income payment:

• Coupon bonds — investors receive regular interest payments called coupons.
• Index-linked bonds — nominal value may change, for example, due to inflation. The coupon may remain unchanged.
• Contingent coupon bonds — interest payments depend on predefined conditions. The income is not guaranteed, but the calculation rules are specified in advance.

There are also fixed-income securities that help reduce portfolio volatility during periods of crisis and instability. They can be divided into two types:

• Debt securities — instruments that provide fixed interest payments for the use of the investor’s funds (for example, bonds).
• Equity securities with fixed income — most commonly preferred shares, which provide stable dividend payments subject to the issuer’s terms and conditions.

ETFs And Mutual Funds

Mutual funds and exchange-traded funds (ETFs) are convenient tools for those who do not want to select and manage individual assets themselves. They allow you to invest directly in a ready-made set of securities.

• A mutual fund is a form of collective investment. The funds of many investors are pooled and transferred to a professional management company. Investors purchase shares in the fund. The amount of income depends on changes in the value of the fund’s assets and the number of shares purchased.
• An ETF is a fund that is traded on an exchange like a regular stock. It is a fully formed investment portfolio that typically tracks a specific index, economic sector, or asset class. The main advantage of an ETF is that it is easy to buy and sell. Investors can purchase them through a broker just like any other security.

Currencies, Real Estate, and Commodity Assets

Alternative investments refer to investments in currency, real estate, and commodities like precious metals and oil.

• Currency. Investors can profit from changes in the exchange rate between two currencies. This ratio is called a currency pair. Income is generated by the difference between the purchase and sale prices. These are usually short-term and riskier strategies, which is why currency trading is considered speculative.
• Real estate. Investing in real estate is usually considered a more conservative choice, as it is intended for the long term. Funds are invested in residential or commercial properties to generate income from rent or subsequent sale at a higher price. Real estate is often used as a way to protect capital from inflation, as its value typically increases over time.
• Commodity assets. They include gold, silver, oil, grains, soybeans, and other raw materials. Investors usually focus on the most liquid instruments. These markets can be highly volatile and are often used for short-term trading. While gold is widely regarded as a safe-haven asset for long-term investment, most other commodities carry higher risk and are generally less suitable for conservative portfolios.

Asset Allocation Strategies for Investors

When creating a stock portfolio, the main goal is to allocate your assets wisely. It is important to find the right balance by considering how different assets relate to each other and their risk levels. Ideally, if some investments lose value, others will offset those losses with gains. This strategy helps keep your portfolio stable over time.

Investors take different approaches to managing their portfolios. Some review and rebalance their investments regularly to keep set proportions, while others prefer the “buy and hold” strategy and rarely make changes. Because of these differences, asset allocation strategies can vary based on how actively an investor wants to manage their portfolio.

Active Asset Allocation

This investment model features a large share of volatile assets, mainly stocks, along with commodities like gold or oil. With this approach, investors regularly rebalance their portfolios, actively buying and selling to adapt to changes in the market.

Examples of active asset allocation:

• 8–10 stocks from 3–4 economic sectors;
• 13–15 stocks from 6–8 sectors;
• about 10 first-tier stocks and 1–2 commodity assets.

This approach calls for patience, analysis, and a tolerance for higher portfolio volatility.

Passive Allocation Strategy

This type of portfolio has a high proportion of less volatile assets, mainly bonds. Stocks or commodities can be added to the portfolio to boost potential returns.

Such strategies are often implemented through packaged investment products, such as balanced funds or ETFs. Investors rarely revisit their portfolio structure and typically maintain their chosen allocation over the long term.

Examples of passive allocation:

• 50% bonds and 50% major company stocks;
• 40% bonds, 30% stocks, and 10% metals;
• 25% each of bonds, stocks, metals, and major currencies.

The main purpose of this strategy is to keep the balance between risk and return while letting investors stay out of the management process as much as possible.

Portfolio Diversification Techniques

Portfolio diversification is the distribution of funds among different assets, industries, and regions. It is intended to reduce risk and make the portfolio more resilient to market fluctuations.

Portfolio diversification follows a simple rule: do not keep all your money in one asset class. If one asset loses value, others may hold steady or rise, helping balance risk and return.

Modern portfolios typically employ several types of diversification.

• By region. The portfolio includes assets from various countries, as economies develop at different paces and markets may perform unevenly.
• By asset class. Investments are allocated across various instruments such as stocks, bonds, commodities, currencies, and other asset types.
• By economic sector. Investors choose companies from different industries, for example, technology, banking, and energy.
• Within a single asset class. Multiple instruments of the same type are included, such as shares of different companies. Each typically represents about 2–6% of the portfolio to reduce reliance on any single holding.

Portfolio Management and Rebalancing

Portfolio management is a crucial part of any investor’s job. Without regularly monitoring your investments and making timely adjustments, your portfolio can gradually drift off course, and the level of risk may end up higher than you originally intended. One of the most effective tools for staying on track and keeping your risk in check is rebalancing.

Portfolio rebalancing is the process of bringing your portfolio back to its original asset allocation, consistent with your chosen investment strategy, goals, and risk profile.

It helps keep risk under control and prevents your portfolio from becoming too heavily concentrated in a single asset or sector. There are three main rebalancing methods that investors commonly rely on.

1. Sell assets that have risen and buy those that have fallen. For example, if stocks and bonds initially made up 50% each, but stocks grew to account for 60% of the portfolio, the overall risk level would increase. In this case, you could sell part of your appreciated stocks and use the proceeds to buy bonds, bringing the portfolio back to its target allocation.
2. Reinvest dividends and coupon payments. Stocks and bonds generate income in the form of dividends and coupons. Instead of withdrawing this cash, you can direct it toward assets whose share in the portfolio has decreased, gradually restoring balance without selling existing holdings.
3. Add new funds. If rebalancing with internal resources is not possible or desirable, you can deposit additional money into your brokerage account and purchase the underweighted assets. This increases their share and returns the portfolio to its target structure.

Conclusion

Building an investment portfolio is the foundation of successful investing. The level of risk and potential return directly depend on how assets are allocated.

To ensure that your investments yield consistent returns, you need to develop an investment strategy that takes into account your age, financial capabilities, risk appetite, and personal goals. Your portfolio should be tailored to your specific needs.

You should follow risk management rules, keep your portfolio organized, and diversify it to make your investments more predictable. However, keep in mind that any trading and investing comes with risks. Basic financial knowledge and money management skills can help you minimize potential losses and boost your long-term returns.