How to Build an Investment Portfolio
In the complex financial world, a well-maintained portfolio is vital to any investor’s success. You need to build a portfolio which should match your style, meet your future cash flow needs and most important should able to give you peace of mind. With this background, let’s look at what is an ideal investment portfolio and how to make it.
What is Investment portfolio?
In common parlance, Investment portfolios are a collection of diverse assets such as Bond, Equities, commodity, real estate etc. Investment planning is a process. A successful investment portfolio develops from a deliberate planning process based on your specific goals / objective, choice and opportunities and tolerance for risk. The most primary investment objective is the safety and security of the capital.
What are the steps to build a portfolio.
Portfolio construction is a disciplined, personalized process. In constructing of the portfolio, the individual risk and return characteristics of the underlying investments must be considered along with your unique needs, goals and risk considerations. One should have following steps
Step 1 – Identify your investment objective / goals – one should create his investment based his risk profile. It is purely based on cash flow requirement, objective and risk tolerance. Generally an investor has three types of investment objective one Accumulation, second preservation & third is distribution.
Step – 2 – determining the Appropriate Asset Allocation for You – Based on the risk profiling, one should allocate asset into different classes such as stocks, Bonds, commodity and alternative asset class. Research indicates that the key to long-term performance is effective asset allocation. This is probable may be the most significant aspect of portfolio construction. Efficient asset allocation decisions can make all the difference in the overall return of the portfolio.
Step 3: Diversify across investment styles – One has to realize that the more you take a risk better is the return. Based on this principal there are two types of investor one is the conservative investor and the second is the aggressive investor. The conservative and aggressive investor is based on their age and risk profile. Based on this, you can decide from different investment styles such as 1) high income portfolio 2) income portfolio 3) balanced portfolio 4) balanced growth portfolio 5) growth portfolio etc.
Step 4: Review your portfolio and investment mix – Secondly, over a period of time, your circumstances and circumstances may change. With this, your portfolio should be periodically reviewed with your goals and objectives. One should perform a periodic review of the portfolio from time to time. If these things change, you may need to adjust your portfolio accordingly. Both the investment style and mix & asset allocation should be re examined. Like, for example, if your risk tolerance has dropped, you may need to reduce the equity exposure.
Portfolio construction & steps to be adopted
|Process Flow for portfolio construction|
|Step||Description||Key Consideration||Steps to be followed|
|Step 1||Establishment of Goals & Objective.||Determine Investment parameter.||Risk Profiling of the client.|
|Cash flow requirement.|
|Step 2||Asset Allocation||Define Investment Strategy.||Optimize risk & return trade off.|
|Determine your asset allocation.|
|Step 3||Diversify among Investment style.||Implement Investment Strategy.||The portfolio construction process.|
|Evaluation of investment structure.|
|Step 4||Performance monitoring.||Provide Ongoing review & adjustment.||Ongoing review of objectives and strategies.|
|Changing client circumstances.|
|Changing market conditions.|
The real challenge is to build a well-balanced portfolio with investments across multiple asset classes which offer diversification & perform consistently in different market scenario. Secondly, a well-diversified portfolio is your best bet for consistent long-term growth of your investments.
After global slowdown, we all learned that you cannot control investment climate. Volatility has become is part of investing. Your Investment strategy should build it such way that it should meet your goals and expectations and aligning investments to your risk profile
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