Investing is pretty complex due to several investment options available, and creating your investment portfolio is harder. The investment portfolio is simply the collection of different assets held by you like stocks, mutual funds, debt instruments,exchange-traded funds, etc. Unless you are highly experienced with investments in various types of assets and their process, creating a portfolio may seem like climbing Mount Everest without support supplies.
We do have some good news for you. Building your investment portfolio is not as hard it seems. Several things should be taken care of, but you will fall in love with the process once the knowledge is acquired. So let’s see the 7 strategies to help you build your perfect portfolio.
Strategy 1: Know Yourself
What is your age? What are your goals? Where do you see yourself five years from now? These questions may make you think you are interviewing for a job. However, these questions need to be answered to help create your portfolio. A younger person generally can take more risks and has higher earning potential in the future. On the other hand, a person in 60’s will typically not have significant earning potential in the future and therefore would prefer lower risk.
The portfolio is also dependent on the goals you want to achieve through the investment amount. Whether you want to retire early or grow your investment for your children and so on. By defining your goals, you can plan the risk you are willing to take and the expected return you require. These two factors (risk and expected return) are key to creating a portfolio.
Strategy 2: Know the investment options
Now that you know the risk and return you are expecting, the next step is to look for the investment options available to you. Some of the available options include stocks, fixed income, mutual funds, ETF’s, real estate, etc. The risk and expected return of each of these are different and will influence your portfolio return as a result.
Stocks generally can give high returns but, as a result, are riskier. Fixed income instruments have lower risk and lower returns. The risk and returns of mutual funds and ETF’s depend on what these funds are made up of (stocks, debt, gold) and their proportion in it.
Real estate is considered to be having risk as they generally have lower liquidity and the investments required in it are high. However, a new class of real estate investments known as real estate investment trusts (REITs) have come in recent times. These allow investors to invest in real estate for a lower amount by getting part ownership in real estate.
Strategy 3: Start mapping out your portfolio
Once you have decided on your goals, risk and expected return from the portfolio and know the options available, the next step is to design the portfolio. You can select the allocation among different asset classes by yourself or by using the help of a registered financial advisor.
The decision here is to allocate how much investment in different asset classes. For example, a young investor with a long-term horizon and who can take higher risk would have more investments in stocks and equity mutual funds with a smaller portion in debt instruments. While a person close to or in retirement would have more investments in debt securities to get fixed returns and some exposure to stocks and real estate for capital gains.
Strategy 4: Time for execution
Once you have decided on how you will allocate your investments, it’s showtime! The more you delay your investment, the higher are the chances of losing extra returns due to the power of compounding. Also, the further you delay your investment, the more time it will take to achieve your financial goals. If you feel lazy, use different features offered by several investment products that automatically execute the transactions for you. These include SIP’s or standing instructions to deduct a set amount for investment in deposits and so on.
Strategy 5: Track your investments
With the investment done, it is not always ideal to forget about it. You must monitor the performance of the investments at certain intervals, like every quarter. By regular monitoring, you can assess the performance of investments, but over monitoring may work against you. Suppose the investor engages in over monitoring the portfolio, like checking the investments every day or every hour. In that case, it may make the investor take irrational decisions, which can harm the portfolio.
Suppose you see an investment falling in value. In that case, you may want to sell the stock and cut your losses, defying your conviction that the investment has a great future. In the same way, if an investment has increased in value, you may be inclined to sell it for the existing profit even though it has great potential in future. These are the reasons why experts advise avoiding engaging in over monitoring.
Strategy 6: Rebalance when necessary
As the markets fluctuate, there is a possibility the asset allocation done by you has changed over time. It may also be possible that you want to change your asset allocation strategy due to a change in risk capability, goal, need or expected return. This requires you to rebalance your portfolio when necessary.
The rebalancing is done by selling off the investments you want to reduce and buying the investments you want to increase. Rebalancing should generally be once a year if needed, as regular rebalancing incurs high costs, which may eat into your portfolio’s returns.
Strategy 7: Be regular with your investments and avoid debt
To create wealth, investments have to be done regularly. Investments are not a one time process that you do and forget. As a habit, set aside a fixed amount of your income and invest that as per your asset allocation strategy. This will help you maintain an investment discipline, grow your wealth, and reduce the risk in your portfolio by averaging out the costs, especially if the markets are falling.
Another thing, do not use debt for your investments. Several people take up loans to invest, especially in the stock market, thinking they will get rich soon. However, the stock market is not a get rich quick scheme. It requires years of persistence to grow wealth significantly in the stock market. A crash in the market or incorrect stock selection will create a heavy financial burden if you have invested the debt money.
Conclusion
If you clearly define your goals, risk and return, you can create a good portfolio which will help you achieve your financial goals with ease.
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