Individual Investor who has done investment in various asset classes. Investments could be held directly by the individual investor or by an asset manager. Ideally, an investor should construct an investment portfolio based on his risk appetite. The portfolio asset classes could be across various asset classes in different sizes.
Investing or Holding too many stocks cannot be called Portfolio.
The portfolio is the most misunderstood and overused concept. Last time when I asked someone have you kept your portfolio managed?, “[Y]es I am actively managing my investment, I am investing in 5 Mutual funds and all are Bluechip”
When it comes to Portfolio this is the problem of many, most of them don’t know this is a problem.
Saving or Investing your entire amount in Savings account and Fixed Deposit also cannot be called Portfolio.
“The challenge of successfully managing an investment portfolio goes beyond making a series of good individual investment decisions”
Understanding What is PortFolio?
A collection of different asset classes based on one’s risk appetite and future expectation and financial need is called Portfolio. A portfolio is of different types such as:
- The Aggressive Portfolio
- The Income Portfolio
- The Defensive Portfolio
- The Speculative Portfolio
- The Hybrid Portfolio
Every individual’s need for a portfolio might be different from another. The gross mistake most people do if copying others portfolio. To save pennies from the financial advisor they try to replicate the advice given to a colleague and friend. This hardly works because everyone is different.
Everyone has a different approach to explain the same thing. Here are some of the definition available.
Objective of Portfolio Management
Why should anyone in first place consider Portfolio? Even if we consider portfolio what are the main benefits and advantages?
“Successful portfolio management transcends stock picking”
I am going lay down the exact points one should not overlook while managing one’s portfolio. Individually managed or professionally managed these points should not be amiss. I am not going to explain you in details perhaps, just lay down to you all the points that are most vital when it comes to portfolio management.
- Security of the Capital
- Growth of the Capital
- Advantageous Tax Status
- Diversification of Portfolio
- Consistency of Returns
- Maintain Purchasing Power
- Risk Minimization & Profit Maximization
- Consideration of income, budget, age.
These key point if one considers while creating an investment portfolio one’s chances of success increases. The above mentioned are the advantages as well as the key points while constructing a portfolio.
I remember once listening to a person, “[I] have huge investments but there was a time when I never had cash to carry out even most of the basic transaction, neither did I have liquid emergency fund”
This is where the role of financial advisor comes into play. A good financial advisor makes sure that not only he does keep in the above point in mind while constructing a financial plan but also the financial advisor’s performance pays for himself.
How Risk Tolerance and Portfolio Allocation go hand in hand?
Financial advisor’s performance more often than not depends on your clarity about investment and what to expect from investments. Based on the portfolio allocation you choose for yourself you decide your risk acceptance, vice versa is also true.
Choosing either Risk or Return based on Fear and Greed is very crucial for a successful investing. An actively managed portfolio has a higher chance of getting a benefit of this when compared to a sleeping portfolio. A conservative portfolio will usually consist of blue-chip companies, dividend-paying companies, debentures, bonds, gold, high-quality cash equivalent, market index funds where the risk exposure is comparatively. Usually, an aged person who cannot afford to risk the capital for a longer period of the time prefers this kind of portfolio.
On the other hand, an aggressive portfolio the investor would carry high growth stocks, small-cap stocks, micro cap stocks, private equity investing, high yielding bonds, speculative trades and investment, currency, real estate, black box trading, foreign investment, commodities investments etc.
In the above two options, we are asked to choose between anyone either risk or return. Now there is one type of portfolio which has recently emerged which gives you the best of both the ends. It is hybrid portfolio allocation. This is where asset rebalancing is done on a regular basis to reduce your risk and improve returns. Targeting an efficient asset allocation in the process.
Time to consider on Portfolio Allocation
“There’s more to managing a pile of money than picking stocks. There’s tracking their progress, knowing when they should be sold, getting the right mix of stocks, adding the garlic and lemongrass of foreign issues, and all the rest. It is not a job for amateurs who aren’t willing to commit a great deal of time and study to the process”
You cannot afford to mistake portfolio investing as get quick rich scheme. Just like your risk appetite you have to be clear how long you are going to stay invested. You cannot have an indefinite plan or a haywire plan this will only confuse your investment decisions.
Reasonable time is very important, it is futile of efforts if you are having short terms ideas for a portfolio, “[I]n which you invest time will grow”. Time being very crucial because to ride out the short-term market volatility one has to stay invested for longer time periods. It is truly said that markets are voting machine in short-term and weighing machine in the long term.
Secondly, any person who is starting out his life might be interested in Hybrid Portfolio Allocation or Aggressive Portfolio Allocation whereas the person who is about to retire in few years would be looking for a Conservative Portfolio Allocation.
Investment and saving can start off with as little as Rs. 500 per month, Financial Planning for everyone, those who are just starting off. If you are not starting at all then you should read Risk of Not Starting at all.