Generally, a portfolio is a mix of investment instruments that provide handsome returns to an investor in his focused time. It should achieve the goal of an investor within the period of time he expected to have the portfolio. Portfolio selection required lots of study. Investment Goal, Period of holding, investment instruments, number of instruments, balancing and diversification. These are the must considerable points when planning to build a portfolio.An interesting thing is, all the above mentioned factors are inter-linked when you build a portfolio. None of them are avoidable when building an investment portfolio.
Investment Goal is the major factor for an investor to start his investment portfolio. Without a solid goal, that can change your life or once only can achieve in the life, any decision to make any investment will not have serious approach and useless. A common error in this section is, some people have goal of multiplying there money within a limited time. This is not a goal. In stead, this is known as greed. Most of the young and less knowledgeable people falling to this wrong way and finally will lose money because of no plan, no goal in there life to start an investment properly.
In my experience, the best definition for a goal is: “A well decided target in one’s life that required disciplined financial action and patience to get result from this action”. A goal can be anything. Buying a pack of cigarette also can be defined as a goal. But that can’t consider as a life goal. In other meaning, that is not a life goal but it is a temporary goal. Just go to the shop and buy one pack. No one do investment for such goals. Very funny. Life time goal mean, building a house, education of children, a dream holiday etc. This goal required prior plan as well as action to achieve the same within certain amount of time.
Period of holding or Time: Once the investor decided his goal, certainly he should consider the time required to achieve that goal. This is an important point to consider because; building a portfolio by adding different investment instruments where the returns from these investments are entirely depends on time. Such way, time has a major role in investment.
For example, equity investment required a holding period of 8 to 15 years. If your goal is very short and need to be achieved by next 4 years and your portfolio for this goal have only equity investments, that required next 8 to 15 years to get returns, how the goal will be achieved?
From this example, deciding the time to achieve the goal will help you to identify the proper investment products to your portfolio that can give you profits at the time you required.
Investment instruments: As I said above, deciding investment instruments depends on your goal and the time you required to achieve the goal. Your age has influence on selecting an investment instrument. A person near to his pension is not at all recommended to go for equity investment as major into his portfolio. Instead, he has to go for secure investments. Like this, age also a factor when deciding an investment product. A well mix of equity and debt instruments should be considered depends on your age. The formula of subtracting your age from hundred is helpful here. An example, your age is 30 and subtracting the same from 100 will result 70. In your case, you should consider 70% of your investments in equity and equity related instruments and rest 30% to the debt or products the providing capital production. That is a good idea.
Number of instruments: Number has major role in the portfolio in the sense of investment instruments. You could be able to manage your portfolio and monitor the same time to time to avoid laggards and add profit makers. Holding endless number of products can give you pain instead of enjoyment. Less is beautiful in this case. Here, you have to learn from the investor legends like Warren Buffett or Merryll Lynch; a well mix of manageable securities will be helpful to ease your job by managing there easily. To avoid this problem, select one or two leaders from each industry as well as from large cap, small cap, mid cap space. This will give you the benefit of shield from large volatility, sinking of any industry as well as possible inclusion of future profit makers to your portfolio. Avoid any industries that booming very fast. In the previous experiences shows that, fast booming sectors will certainly follow a fast down. A right mix of maximum 24 stocks recommended.
Balancing act: As I said in previous paragraph, selection of an investment is entirely depends on your age. A person near to pension should have debt exposure instead of major equity exposure. Right mix of equity and debt required building a good portfolio and this required timely monitoring to avoid any laggards and add profit makers. Also, reduce or increase exposure to debt or equity depends on your age and risk profile.
Diversification: I have already mentioned the same in the “Number of instruments section. Selection should be focused on different section and different caps. There are possibilities of rising inflation and portfolio should consider the same too. Investment in gold in various forms such as Exchange Traded Funds, mutual funds, bars and coins, ornaments, real estate investment in the form of mutual funds or whatever available to play safely will do better to shield your portfolio from inflation. You can also diversify your portfolio by including international funds especially funds from emerging countries to get international exposure as well as a method to protect your portfolio from local volatility and slow growth.
Patience and the discipline are two must required qualities for an investor. I have clearly written an article in my document regarding this and you can read the same here. Wise action in the proper time using self research and study is a must quality for an investor and that will help to build a core portfolio till a great extend…
So be a wise investor as well as a good commenter to this article…