Investors use portfolios to help them achieve greater returns with a relatively lower level of risk, as they have a high level of diversification.
Holding a well thought out portfolio that includes lots of different types of investments reduces the impact of any one area performing poorly. Building a portfolio is great strategy for lots of investors, experienced or novice.
Below are a series of steps to help get you started with building a profitable portfolio.
What is a Portfolio?
A portfolio is a collection of financial assets that investors hold to minimise risk and maximise their potential gain.
Since there is no way of predicting which investments will perform perfectly, it’s important to build a solid portfolio. This will let you avoid the stress and worry often caused by the daily volatility of the market.
Step 1: Invest with a Purpose
Ask yourself, why do I want to invest? Having a clear goal in mind is essential for building a portfolio, as it will help you understand your goals and what kind of investments will be better for you.
Setting a goal is the first hurdle that many people trip over. It’s important to remember there’s a difference between a goal and a wish. A good financial goal should have a definite amount and a time frame in which you want to achieve it.
A great example of a financial goal is to buy a £150,000 house within the next 10 years, rather than simply deciding you want to be rich.
Step 2: Determine Asset Allocation
To understand your risk tolerance, you’ll need to consider your age and your current financial standing.
- Your Age: your age is important as it determines how much time you have to grow your portfolio. For example, someone fresh out of university just beginning their career will have different financial needs than someone close to retiring. Having more time for your investments to grow allows for riskier investments as if you lose money, you still have time to recover.
- Your Financial Standing: The second factor to consider is your financial situation. This means how much money you already have, and how much you need to achieve your financial goal. For example, a young professional might have a strong financial standing if they have been saving a lot of their earnings. However, someone who has dependants and a lot of outgoings will likely have a weaker financial standing.
Step 3: Portfolio Diversification
This may sound similar to asset allocation. However, the main goal of asset allocation is to allocate your capital in such a way to maximise returns and minimise risk.
Whereas portfolio diversification is a continuous process and will need frequent re-balancing based on changes in market conditions and any changes to your financial needs.
Step 4: Rebalancing Portfolio
Market movements can drastically change your portfolio weightage. So it’s important to keep an eye on the weightage of assets in your portfolio and keep rebalancing once in a while.
Rebalancing your portfolio is all about changing asset allocations promptly, so you can prevent your investment from the potential risk of heavy losses.
To re-balance your portfolio, you need to determine which assets are overweight and which ones are underweight.
Step 5: Maintain Discipline
Picking the right assets and diversifying your portfolio is the start of building a profitable portfolio.
Most investors lose money and give up on investing not because they made poor stock choices, but because they don’t have the discipline needed to become a successful investor.
There are four main points for maintaining the right discipline and mindset for investing.
Think Quality Over Quantity
Most investors chase hot stocks that have given extraordinary returns in the past. However, this doesn’t guarantee a good return in the future. It’s better to have a portfolio with good quality stocks with strong fundamentals and attractive valuations as these are likely to produce far better returns in the long run.
Give it Time to Grow
Investing is a marathon, not a sprint. To do well, you need to be patient and wait for return over a long period of time. So, whenever you invest in stocks, maintain a long term view. It can take years to get a return on your investments, so you have to stay patient!
Avoid Obsessing Over Day-to-Day Volatility
Every investor must understand that markets can remain volatile from day to day or even month to month, but over the long-term the volatility subsides. To avoid the stress of daily market changes, maintain a long-term view on your investments that deliver consistently positive returns over long periods of time.
Only Focus on What You Can Control
As an investor it can be frustrating when things don’t go your way. For example, the political climate can affect your investments depending on the companies you’ve chosen. Instead of deliberating on things you can’t control, try instead to stay focused to your investment strategy.
When building a portfolio, your biggest takeaway should be to remember to be patient. Creating a successful portfolio is like planting a seed, which takes time, patience and consistency to see the fruits of your efforts.