Constructing a well-managed portfolio in today’s financial marketplace is the first step you need to take if you want to win in investment.
--BY PALISTHA AMATYA
“Committing resources into some endeavour or thing in expectation of a positive return” is the simplistic way in how we define investing. In financial terms, the resource here being committed is the money, the endeavour or thing is going to be financial investments (stock, bonds, fixed income securities) and the return is the difference between the money we end up with versus the money we put in. With the ultimate motive of getting the maximum return investors obtain different strategies and techniques to structure their portfolio in a profitable manner.
Though the world of investing can be a little bewildering and tricky sometimes, one who is well aware of their own game can become a millionaire or even billionaire, take Warren Buffett as an example.
Constructing a well-managed portfolio in today’s financial marketplace is the first step you need to take if you want to win in investment. Making wise decisions while choosing your investments is very necessary- form your portfolio in such a way as if you’re putting up your own dream team of star performers.
By following some guidelines, you can give yourself a far greater chance of constructing a winning portfolio:
Know your risk and return appetite
Before stepping into the investment world, the most important aspect an investor should analyse is their tolerance over risk and expectations in return (risk vs return). It is the most significant and important factor to assess before making any move. Knowing what you can afford to lose, in order to avoid any regret, is the basic strategy you need to have. So yes, you need to analyse the financial situation, and side by side your own personality as well. After this you will likely have an idea about the mixture of stocks, bonds, and cash you want to hold in your investment portfolio.
Form your appropriate asset allocation
With regard to your own risk tolerance and expected return, improvise your portfolio with the asset allocation you want. This is one of the most important decisions an investor needs to make when constructing a portfolio. As investments are divided into different asset classes like stocks, bonds, fixed income securities etc, picking the right one is important in order to obtain the maximum return.
This action highly depends on your own personality but some factors that need to be considered are age and the amount of time you have. A young graduate student (risk taker) will definitely have a different portfolio compared to a 60-year-old man (risk averter) who is on the verge of retirement. Also, investments don’t only come in terms of money, investing your valuable time is equally important.
Choose your assets wisely
If your portfolio leans more towards safer investments like fixed income, government bonds etc, recent news and events will be sufficient enough for investors to make a decision. However, if it tilts towards risky investments like stocks, then more research is needed to analyse the growth potential of the invested company, market timings etc. There are several ways you can go about choosing your assets:
Stock Picking: Among all the assets, this one has higher risk in comparison to others. Choose stocks that satisfy the level of the risk you want to bear in your portfolio. Analyse the companies using your own research techniques and shortlist potential picks, and then carry out more in-depth analysis on each potential purchase to determine its opportunities and risks. These assets hold the most work-intensive weight in respect to others as you have stay current on company and industry news and the price fluctuations in your holdings.
Bonds: While investing in bonds investors should consider several factors including the coupon rate, maturity, the bond type and obviously the market situation.
Fixed Income Securities: Investing in these assets gives you the benefit of enjoying risk-free returns; however, you need to monitor the market structure and interest rate environment.
Don’t forget to Diversify (but up to a limit)
Diversifying has always been the common ground for many investors to reduce risks. While it’s true that diversification reduces risk, an over-diversified portfolio is reluctant to be more exposed to market risks, which cannot be eliminated by diversification. People tend to have a number of assets in their portfolio just to diversify their risks. An investor who chooses to invest in a particular market is exposed to the risks inherent in that market, such as the economic influences of inflation and interest rates that affect the market as a whole. Therefore, the market risk remains. Limiting your diversification strategy to what your portfolio can cope with will be better than over-flowing it with unnecessary stocks that can have a negative effect on returns.
Reassessing and updating your portfolio weightings
Once you have established your desired portfolio, you need to stay updated on news and different market situations. According to Ujjwal Chand, In-Charge of Portfolio Management Services at Kriti Capital, “Return expectations are subjected to the stock market and fixed income market fluctuations, so return expectations need to be recalibrated based on any rapid changes in the stock market and fixed income market scenarios, i.e. market volatility, interest rates, policy impacting financials of companies, taxation changes, etc.” Basically, the market keeps changing according to different situations so investors need to be well aware of the market conditions because the movements can cause the initial weightings of portfolios to change. If factors like financial situation, future needs and risk tolerance alter, you may need to adjust your portfolio accordingly.
Consulting with an investment advisor
It is never wrong to get advice from the people who have a relatively better understanding. Many independent investment advisory firms have come up to act as financial advisors. Constructing an Investment Policy Statement (IPS) with your portfolio manager will framework and guide your strategy and investment portfolio (i.e. long term and short-term goals, fundamental analysis, technical analysis, combined, etc).
Emotional Attachment is a Big NO!
It’s normal for people to get a little emotionally attached to the things they have invested in but doing that doesn’t necessarily create a good outcome. While managing a portfolio an investor should know when to let go of the toxic assets in the portfolio. Though a portfolio may be well planned with all the criteria being met, one of the perks of investing is, “there isn’t any right way”. So, investors should set a limit on both their loss and profit. Why profit? Because being too selfish can minimise your potential return. For example, if you have a winning stock in your portfolio that is doing well and you’re greedily holding onto it thinking that it may go up further, sometimes the opposite happens which can reduce the returns.
Some other don’ts are:
- Avoid putting all your eggs in one basket, because we can imagine how that will turn out.
- Avoid herding behaviour because it isn’t always right. Making decisions based on rumour will lead to vacuous decision (for e.g.: tulip mania and the dot.com bubble)
- Taking higher risks lead to higher returns is not always true. People with the motive of getting a higher return in the short-term tend to make aggressive decisions, not always considered as the best choice.
Whether you crave risk or flee from it, have a short-term goal or a long-term goal, the position you take in the market requires a balanced diversified asset mix with precise asset allocation according to your endurance appetite. Because that’s how informed investors strive for financial security and sleep well in any market climate. You can, too.
The author is a BBA fifth semester student at Kathmandu College of Management.