Why Should You Build an Investment Portfolio Early?

Just started your career and seeking easy ways to preserve wealth for the future? Then you are on the right track, as starting investments and building a portfolio from an early age is generally beneficial.

It is because investments have their associated risks. At a young age, your risk appetite is typically higher, and it reduces as you age.

While education costs are inflated by 6% and medical expenses are inflated by 12% to 15%, investing and building an efficient portfolio is a must to preserve wealth for you and your family.

What is an Investment Portfolio?

When talking about investments, especially if you are new to it, you must have wondered what is a portfolio. It is essentially the financial instruments that you invest in. A typical investment portfolio usually contains assets such as stocks, mutual funds, bonds, ETFs or Exchange Traded Funds, cash equivalents, etc.

However, depending on your preference, you might choose to invest in company stocks only and build a narrow-focused portfolio. However, it is always advisable to build a portfolio that is more diversified to spread market risks.

Thus, for example, a portfolio with a mix of stocks, bonds, mutual funds, etc, might help spread risks across assets more effectively.

Therefore, if you are in your 20s or 30s, and if your risk-taking capability is higher, you can start investing in stocks and enjoy potential profits from their growth. Also, you can cushion losses by investing in safer instruments such as bonds and money market instruments.

Reasons to Start Building a Portfolio From an Early Age1. Take Advantage of Higher Risk Tolerance

While you are in a younger age bracket, such as in your 20s or 30s, your risk tolerance might be higher. As a rule of thumb, the percentage of equity or stock investment should be 100 minus your current age. For example, if you are in your 30s, you can invest at least 70% of your savings into company stocks.

Historically, company stocks typically have securities like bonds. Thus, starting an investment early in the stock market might get you the opportunity to capitalise on their growth potential.

2. Stay Invested Longer

From an investment perspective, staying invested in the market for the long term is typically beneficial. Staying invested for years also brings enough time window so that the market can recover from short-term swings. Such a long-term commitment might provide you with an optimised return.

Suppose you are planning to retire at 60. If you start investing from your 30s, you have 30 years in hand to continue investing using your savings from your regular income stream.

3. Get Benefited from Compounding

Aside from the stock market investment, you might also choose a mutual fund investment. With a long-term outlook from an early age, you can capitalise on the power of compounding. If you wonder what compounding is, it is your potential gains from mutual funds getting reinvested to boost your earnings.

Suppose you start an SIP of INR 2000 in a mutual fund with an annualised return of 15% for 5 years. You might build INR 1,74,684 upon maturity. Thus, with a higher SIP amount and a longer horizon, chances of building a higher corpus are also high.

4. Diversification and Rebalancing

While you invest in stocks or mutual funds, you must also employ measures to limit risks. Therefore, investing in fixed-income securities from an early age might help cushion losses potentially better than those that come from direct stock investment or from an equity fund.

Now, as you age, say, at the age of 40, you can shift more towards fixed-income securities. They include bonds and other money market instruments, and you invest 60% in equities and 40% in fixed-income instruments. If you are an HNI, a portfolio management service provider might help maintain a diverse portfolio. They also assist with rebalancing, tax optimisation, etc.

Conclusion

Building an investment portfolio from an early age is better as it gives you enough time to grow a corpus for the future. Also, when you are young, you can explore high-risk investments and get more time to recover from losses with a long-term horizon, diversification, rebalancing, etc.