Investment is not gambling nor does it involve any luck to realize gains. It is more of a strategic game which requires in-depth knowledge of assets and market movements and also building a solid portfolio. A strategically well-planned investment portfolio not only insures you against market volatility but also helps you achieve your investment goals.
Now the million dollar question is: How to create a winning portfolio? Revealed is the step-by-step process of making one’s own portfolio and of maintaining that.
Identifying Investment Goals
Why are you investing? What will you do with your gains? Some common purposes are retirement funding, financing children’s education, starting a new business etc. Determine yours. These goals are completely personal and vary with investors’ age and financial condition.
Depending upon your purpose, you also need to decide whether you will be going for short-term, medium-term or long-term investment? Once all these are decided, it is easy to estimate the amount that needs to be financed from your investment returns.
Asset Allocation
This is the most crucial stage of making your investment portfolio. Depending upon your risk tolerance and your investment goals, you need to choose among many assets to invest in and assign them proper weights in your portfolio. Common asset types are
- Bonds
- Stocks
- Debentures
- Mutual Funds (or ETFs)
- Derivatives
- Real Estate
- Precious metals like Gold etc.
Now, each of these assets is associated with different risk-return combo. Understandably, those assets that offer maximum gains also involve greater risks.
- High Risk :If you are a very aggressive investor, ready to take huge risks, you should allocate around 80% of the portfolio in equities and rest in bonds and other fixed-income assets.
- Moderate Risk : If you are willing to take moderate risks, 50-55% of your total investments should be in equities.
- Low Risk : If you would like it slow and steady, allocate 15-20% of your portfolio to equities. You get a steady income from bonds and other fixed income assets and there is also a chance of long-term capital gain from the equities.
Diversification
All your efforts are in vain unless your portfolio is wisely diversified. You diversify the portfolio not only to minimize the effects of market volatility but to reap off the maximum possible gains from your investments. It also helps to keep the cost of investments at the minimum.
Once you divide the portfolio into different investment instruments, you can further break it down into multiple subclasses in order to achieve greater diversification. For example, distribute your equity investment across different sectors and different market caps. If you like, add some foreign essence to the portfolio. Bond investments can be distributed among government and corporate bonds and short-term and long-term bonds.
Adjustment and Balancing
In my opinion, an investment portfolio is not something that you can create and forget. Subject to market and your personal financial conditions you may need to re-balance and readjust your asset allocation periodically. This involves changing the weights of individual assets, add some or remove some. However, before selling any of your assets, calculate its tax implication.
The Bottom Line
Create a well-planned diversified portfolio, run it and have patience. Don’t get excited by sudden fluctuations because in the long-run everything balances out. Just focus on the factors that you can control.
Good luck with your DIY portfolio!!!
