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A portfolio brings order to chaotic markets
A portfolio is your treasure map when navigating the financial markets. However, some investors overlook portfolios when starting out. So let us break down how to build, manage, and set up your portfolio for growth.
Your personality is your starting point. Here are some questions to get you started. Am I willing to risk a large amount of money for greater returns? Am I aggressive or passive when it comes to building my wealth?
Once you know your investing personality, you can use it to determine your asset allocation. There are four main asset classes. These include Equities (stocks), Fixed Income Securities (bonds), Cash and Cash equivalents, and commodities (highly liquid investments), and Property (real estate and REITs). Investors then diversify their capital across each asset class, with some receiving more or less weighting.
Passive vs. Aggressive
Investors who have a low-risk tolerance and not much time left usually construct a defensive portfolio. Consisting mainly of Fixed Income Securities and Cash and Cash equivalents. On the other hand, younger and riskier investors tend to take a more aggressive approach. In which their portfolio leans towards Equities and Property. All that is left is filling in each asset with investments.
A mixture of risk free assets such as US Treasury Bills alongside the inclusion of risky assets such as Equity can help investors achieve diversification while still maintaining optimal/required levels of growth.
The market is always evolving, which means your portfolio must as well. Because if you are not with the market, it is like going against gravity. Managing a portfolio involves reassessing the asset allocations and the investments within them.
Selling overweighted assets and buying underweighted.
Investors should look to sell overweighted assets that are becoming too risky or showing signs of growth stagnation – vice versa for underweighted assets. For example, in stocks (equities) understanding the current beta (systematic risk) can help you decide how much capital to invest in that company. A 5 Year Beta closer to 0 (example: 5Y Beta 0.44) will mean the stock is a defensive asset which aims to mitigate portfolio losses if there is a market downturn.
In the same sense, Beta’s above 1.5 generally tend to be cyclical assets that outperform the market during an upswing in the business cycle. Therefore, investors should also evaluate the current market conditions and execute changes in holdings to suit.
The overarching idea of a portfolio is to grow your capital overtime. The two keys for portfolio growth are 1) effective rebalancing and 2) continuous learning.
Rebalancing and continuous learning
Balancing your current portfolio towards the underlying market direction should protect your capital while providing growth. For example, in bearish markets gearing your portfolio towards defensive assets, like bonds and cash equivalents, should provide capital conservation and small growth. In bullish markets rebalancing your portfolio towards more aggressive assets, like equities and property, may provide greater rewards. However, continuous learning on all four asset classes is a must for long-term success. Because bulls and bears make money, but study players can trade in any market.
Understanding the theory behind a portfolio is only one piece of the puzzle. Putting the information into action is where the true investment learning takes place. Now you can 1. Build a portfolio 2. Manage it, and 3. Grow it.
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We want to remind you that YIG’s Portfolio blueprint is only for educational purposes. Our portfolio blueprint is the result of many months in planning and research. It is important to conduct your own research before committing to any financial investment. Make sure you understand our disclaimer as this information is not advice. It is our research and commentary that we love providing for free, for all generations of investors alike. If you like our content and research, be sure to follow our stock market research.