We have already gone through the details on how to choose a market for investing and how to choose a broker. Let’s look at how to create an investment portfolio in this post. Before we jump into portfolio creation, let me answer some of the questions you may have.
What Is An Investment Portfolio?
Before we go further in portfolio creation, let’s look at what is an investment portfolio. An investment portfolio is a collection of assets. This is like an account, that holds all your investments. You may not be able to hold all your investments in one account. But, you can hold stocks, bonds, funds and ETF’s in one account depending on your broker.
How Much Do You Need To Start A Investment Portfolio?
Are you wondering how much do you need to start a portfolio? The answer is simple, it can be as simple as 1$. In the past, the investment required bigger capital to start with. Nowadays, investment does not need a lot of capital. Thanks to the many low-cost brokerages that removed the higher barrier of entries.
It is always better to start small, learn how it works before you put more money into an investment. This is like testing the water before you jump into a huge water body. You will enter the waterbody by a side where you can see the floor, then move further. This is to make sure that you are comfortable with the depth, under current etc.
Always start with a smaller amount. Once you familiarize yourself, with how it works, you may deploy more of your money. Keep in mind your risk tolerance. Where possible, use a paper trading account to play with dummy money and learn.
Do You Need Professional Help?
You may not need professional help if you know at least the basics. In the KYC checks by the broker, they will ask some questions to understand your experience too. If you don’t know anything about investing, learn more before you go any further. After learning and understanding, if you are confident enough, start with a small. If you don’t understand. yet, wish to invest, always seek professional help. Professionals can help you with understanding your risk profile. Recommend your products based on your financial state.
Steps To Construct Investment Portfolio
I hope you understand the risks and get the necessary knowledge of investing. Let’s look at how you can construct your portfolio.
Choose Investment Style
You need to choose an investment style. You can have different investment styles. For the ease of understanding and not to confuse yourself, it’s better to start with one. As a beginner, I didn’t know a lot about the investing process. Hence, I started passive investing with the help of a Robo Advisor. A Robo advisor is a computer that performs the asset allocation and executes the buy/sell. They will ask you for your consenses in their apps. Most Robo advisories have some level of human oversight.
After reading more and gaining knowledge about investing, sold my positions in RoboAdvisor. Started doing my research on companies and picking them.
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Active Investing
Active investing is where you do all the investing by yourself. You plan your asset allocation, perform the stock picking and execute the trades. If you have the knowledge and time to do the company analysis and research, you can do Active Investing. Depending on the interval of your choice, you can adjust holding and re-invest profits.
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Passive Investing
Passive Investing can be helpful when you don’t have the necessary knowledge or time. Robo or a physical advisor will do the job for you with a fee. Since the money involved is yours, you need to accept the risk involved. Advisor will ask you to make some simple decisions based on some options.
When I used a Robo Advisor, they asked me to choose a thematic portfolio. They also mentioned the risk indicator, volatility and past performance. It also indicated the smallest investment amount. Once I transfer the money to this account, It will execute the transaction and send me the contract note. I was asked to accept/reject the proposal for rebalancing every 3 months. Also received dividends when the underlying stocks declared a dividend.
Decide Your Asset Allocation
If you prefer active investing, you need to decide on your own asset allocation. Before you perform asset allocation, you need to have an idea of the asset class. Read this to find out more about the different asset classes.
Your decision depends on the time horizon and risks tolerance. If you are young and have a large time horizon, you can allocate more for equities. You may subtract your age from 100 and the result can be your allocation for stocks, remaining in bonds. If you want a balanced portfolio or do not prefer the high volatility of stocks, give 50-50 for stock and bonds.
Since I’m 28 years old and I do not need the money in the short term, I have a 100% allocation on equities. This is with the finding that good company stocks will go up over the long term. I’m investing for financial freedom. So, I’m gonna ride through the ups and downs of the market.
Allocation needs to be on a case by case basis. An allocation that works for my personality and goals may not work for my friend or spouse. So, consider your reason to invest, intended time to stay invested before deciding. It’s not a dead-end after you decide though, you can always adjust your allocation.
Decide The Number Of Positions
Once you decide your preferred allocation, the next decision is the no of securities you want to hold. This is important as we want to reduce the concentration risk, always remember not to put all eggs in 1 basket. It is also important not to over diversify. 8-15 positions can be good enough.
I like to hold about 10 stocks in my portfolio, each with a 10% allocation, such that it result in 100% stocks. This helps me to focus the research on these 10 companies. It is not mandatory to pick 10 or more at one go, you can take 10% and buy only 1 company. Once you have identified more companies, you can use another 10% to buy that too.
Dollar-Cost Average
Over time, you can add more stocks of the 10 companies by dollar-cost averaging. accumulate money for 1-3 months and buy more shares on a monthly or quarterly basis. This way you can average the cost basis. For example, you have accumulated 10,000$. you can buy 1,000$ worth of stocks of each company.
It is not a must to dollar-cost average, you can stick to lump-sum investing too. If you are good at timing the market, you can wait for corrections in the stock prices and buy when the prices are low.
While it is difficult to time the market over a period of time, it is safer to dollar cost average. This way, you buy when the prices are high, low and you get more shares when the stock is trading cheaper.
Review And Track
Once you perform your initial allocation, the process does not end. You need to review the performance regularly. While looking at your account daily/weekly does not do any help, do it on a monthly, quarterly and yearly basis.
Look out for the news about the company, its financial statements, investor presentations etc… These are aimed to provide the investors with up to date details. Sell positions when the company fundamentals changes or you find better opportunities.
Your broker account should have the necessary charts to show your account performance. If it doesn’t, you may also rely on third-party portfolio trackers like yahoo finance.
Re-Balance
You need to Re-balance your portfolio once every 6 months or on a yearly basis. This is to stick to the 10% allocation on each stock, all stocks will not have the same level of price fluctuations. When one stock over-performs the others, you can sell some of it and divide the money into buying the others.
Doing re-balancing on a monthly basis may not be a good decision, due to the cost involved in buying and selling. So, stick to a less frequent re-balancing. Yet, remember that there are anomalies in the prices where a company stock go 200% over a few months time. You may book some profit and divide among other stocks too.
Conclusion
Above mentioned are the steps I have taken while constructing my portfolio. Always remember that there is no one solution that fits everyone’s needs. You always need to look into your finances, risk tolerances, risk appetite and goals. It is important to not lose capital than grow capital. In case of doubt, refer to certified financial planners/advisors for professional help.
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