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Formation of an investment portfolio

2 years ago

The main goal of the investor is to form a balanced investment portfolio. In this article, we will present a short algorithm for competently solving this problem.

Step 1. Analysis of goals and constraints

First of all, the future investor must understand and be aware of his real opportunities and limitations. For some, the main desire is a quantitative and rapid increase in their capital, for others, its stable preservation. The best thing to do is to strike a balance. Since in any investment high profitability implies high risk and vice versa.

The main factors in the construction and formation of an investment portfolio should be:

– Time factor and planning horizon. It is the fundamental setting. The further the planning horizon, the higher the profitability in the time period due to the operation of a complex of factors, primarily compound interest. At the same time, with short planning periods, risks increase.

– Liquidity factor, that is, the presence in the investment portfolio of really liquid assets that are supposedly possible to sell in a certain situation that requires it, and at a good, close to the market price. The presence and percentage of such assets depends on the strategy and resistance to risk, as well as the general state of the financial sector at a certain point in time.

– Factor of tax legislation. When opening an investment portfolio, it is very important to analyze the tax environment for a general understanding of the tax burden and aspects associated with different types of investment. What directly depends on the state of location or residence of the investor, due to various restrictions.

– The factor of personal perception of the market and investment. It highly correlates with your personal attitude to certain instruments, as well as the moral aspect of investing in various gray and semi-legal areas.

Step 2. Search and selection of tools

An investment portfolio can be a hodgepodge of stocks and bonds, mutual funds and exchange-traded funds, bank deposits, cryptocurrencies, precious metals, real estate, futures, and more. All of them differ in a set of fundamentals, as well as in the degree of risk and profitability. The rule of direct dependence of the level of risk and profitability is also applicable here.

Fundamentals of forming an investment portfolio

At the initial stages, it is desirable for a young investor to have a certain mentor in this area, at least a good analyst, and at the same time study all types of investment for their own qualitative understanding of the issue. You can make a list of short hints:

– Start with what you understand the most, an important rule says – never invest in areas that are not clear to you and with the help of tools that are not clear to you. This is the most risky strategy.

– Analyze the entire area of ​​investment in a comprehensive manner for a deep understanding of the processes, identifying leaders, outsiders and a clear understanding of the reasons for their positions.

– In the beginning, prefer liquid instruments, that is, those that can be sold at any time without big losses.

– Do not start with risky investment strategies and tools, especially without knowledge and skills.

Step 3. Adjustment of the percentage within the Investment portfolio.

Distribute your portfolio in such a way that passive and stable investment instruments make up at least 70% of it, this part should work for the long term and bring you a constant income in the horizon of 5-10-20 years.

The remaining 30% is quite reasonable to implement as part of active investments with greater risk and higher returns, while not changing the rule of careful analysis of any instrument.

If you need and want to “tickle your nerves” and realize the need to chase “lucky punch”, that is, a big win in high-risk conditions – allow yourself to allocate 5-10% of the portfolio for investments in super-profitable and super-risk instruments. At the same time, all the same, doing it on the basis of a clear analysis and understanding.

Diversification is a very important factor. Never keep all your eggs in one basket. Thus, you directly manage the possible risks.

In this regard, there are two approaches, narrow and wide. With narrow, you distribute funds between instruments or assets of one area or industry. When broad, your assets and funds are divided among different areas, industries and countries. Ideally, both approaches should be applied simultaneously. This will protect you from a holistic collapse even in the event of a complete failure of one of the assets.

Investment Portfolios can also be divided by risk classifier into:

Conservative, least risky. As a rule, it consists of “blue chips”, that is, shares of well-known and large companies, precious metals, real estate. The main characteristic is long-term stability, rare revision, low yield, focus on capital preservation and moderate income due to the growth of quotations, dividends and bonds.

Aggressive – aimed at obtaining a large income in the short term, forex, trading with leverage, cryptocurrencies. The whole range of risky instruments, which attracts with high profitability and at the same time a high level of risk

Moderate, is the golden mean, a combination of elements of an aggressive and conservative type in a balanced ratio, which, with the right approach, gives the most acceptable result both strategically and tactically. The risk is moderate, the capital gain in the short term is average.

Step 4. Performance Calibration and Portfolio Adjustment

It is necessary to periodically assess the effectiveness of the portfolio, both as a whole and separately for assets and instruments in order to carry out the correct correction and balancing in the ratios and percentages of the distribution of funds.

Designate in advance for yourself the level and moment of exit from a certain asset or instrument with its gradual subsidence. If the price falls below the level designated for you, get rid of it. If necessary and possible – hedge, this can insure you against irreversible losses.

When investing long term, keep an eye on the percentage of your portfolio, that is, having a portfolio divided 50/50 between stocks and bonds and situations when something has sagged or risen in price, it is quite reasonable to bring your assets to the initial distribution ratio.