😳 🎟️ 😑 How to Build a Profitable Investment Portfolio: 4 Practical Steps 🍂 🉐 👩🏼‍🌾

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ability to select assets for investments is a key skill for making profit on the stock exchange. To solve this problem, investors need to analyze their own psychological portrait, set realistic investment goals and learn how to properly distribute different types of assets within a portfolio.

Investopedia has published educational material on how to build and maintain a high-quality investment portfolio. We have prepared an adapted version of this useful article.

Step # 1: determining the appropriate proportions of different assets

The primary task for solving when drawing up the investment portfolio is to choose assets that correspond to both the current financial situation of the investor and the desired goals of his activities. In addition, at this step it is necessary to evaluate such factors as the amount of time that the investor will be able to devote to his portfolio, potential future costs that may require the sale of part of the assets, etc.

For example, a young graduate of the institute 22-23 years old without a family will use a different strategy than a 55-year-old married professional who plans to pay for education for the youngest child and thinks about retirement.

It is necessary and take into account your own psychological profile and risk tolerance. An investor should ask himself a question: is he ready to suffer temporary losses if he is sure that in the future the strategy will bring serious profit? Or will it be more comfortable for him to earn less, but also to avoid strong drawdowns? Everyone wants to summarize successful results at the end of the year, but if in the process of achieving a result you cannot sleep at night with short-term falls, can you continue to follow the chosen strategy?

It is also extremely important to clearly understand your own financial situation - what free money is there now, what about current liabilities, is there any chance of sudden costs in the future? The answers to all these questions are reflected in the final investment portfolio. The desire to earn more always comes with great risk, and more reliable tools, likemodel portfolios or federal loan bonds (especially purchased using IIA accounts ), bring less. You can’t get rid of risk at all, but if you have a family that needs to be fed, and there is not much free money, you want to take less risk than when you are twenty years old, and there are especially no obligations.

Step # 2: building a portfolio

As soon as the investor determines the composition of his portfolio, it is time to actually build it. He will need to open a brokerage account online , install trading software , and start conducting transactions.

At first glance, there is nothing complicated here - stocks, bonds, currency - understandable tools, in the acquisition of which there is no separate science. However, asset classes can be divided into subclasses - and each of them will also have its own risk parameters and potential profitability.

For example, an investor can divide the portion of the portfolio that falls on shares between shares of companies from different industries or sectors of the economy, consider companies with different levels of capitalization, local or foreign issuers. Bonds can be short-term or long-term, state and corporate, etc.

There are several ways to select assets and stocks to execute an investment strategy:

Stock selection

Securities must correspond to the level of risk that the investor is ready to take on. Here you need to analyze factors such as the economic sector, market capitalization and market share, type of stock, etc. This is a rather time-consuming process that takes a lot of time. In this case, in general, large companies with a long history, leading in their market, are subject to lower risks.

Bond selection

When an investor chooses bonds, he will need to study the coupon income, bond type, issuer credit rating, and also analyze the general situation with market rates.

Buy ETF

ETF (Exchange-Traded Funds) is a great alternative to investing in stock indexes for a limited investor. This financial instrument is traded on the stock exchange in the same way as stocks. In fact, these are foreign exchange investment funds, which are a portfolio of shares or other assets that completely repeat the composition of the target index. For example, ETF with ticker SPY reflects the dynamics of stocks of the S & P500 index. Shares of ETFs themselves are also traded on an exchange.

ETFs cover a large number of different asset classes, so they should be considered as a tool to “average” the portfolio with adequate risk.

Step # 3: reassessing the allocation of assets within the portfolio

After you have compiled a portfolio, you need to constantly analyze it and rebalance it. This is necessary because initially successfully selected parameters for the distribution of various assets begin to work worse over time. The situation on the market is changing, crises arise and pass, they can affect both a specific industry and the entire economy.

The financial position of the investor himself, his future needs for money, even his attitude to risk, can change. If such changes occur, you need to make adjustments to the portfolio. If you feel that it’s becoming harder and harder for you to experience the drawdown of the portfolio for the sake of the chosen strategy, this is a sign that you need to change it. Or you have increased stocks of money, and now you are ready to act on the exchange more aggressively - this also happens.

For rebalancing, it is necessary to identify “overloaded” and “underloaded” segments of the portfolio. For example, suppose an investor has 30% of the portfolio — these are shares of small companies, and the initial investment strategy assumed that this type of stock would have no more than 15% in the portfolio. In this case, you need to rebalance.

Step # 4: strategic rebalancing

After the investor has decided on what volume of assets in the portfolio needs to be reduced, and which ones - to increase, and by how much, you need to go back to step two and select the assets that need to be bought. It may also be necessary to sell part of the assets, which, according to the analysis, turned out to be too much.

The most important point in all these operations is the tax consequences of the sale of assets at a particular point in time. If it turns out that you are selling conditional shares, and they have grown in value since the time of purchase, then from the point of view of the legislation it is a profit fixation, and you have to pay taxes on profit. From this point of view, it may be more profitable to simply stop buying assets of this type, and increase the volumes of other segments of the investment portfolio. So you can reduce the weight of any asset in the portfolio without financial loss.

At the same time, if you think that there is every reason for the fall in the price of assets, perhaps they should be sold regardless of further tax consequences. If the stock price falls by tens of percent, it is in any case worse than paying income tax.

Conclusion

A well-diversified investment portfolio is the key to long-term profit from working on the stock exchange. To build it, you first need to choose the right distribution of assets of different types for you and your situation. Then, you need to break them into subtypes for better risk control.

After creating a portfolio, it is necessary to periodically reassess the distribution of assets within it and accordingly rebalance the portfolio. At the same time, many factors need to be analyzed, including possible tax payments following the results of transactions. About what costs await exchange investors, we wrote in this material .

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How to Build a Profitable Investment Portfolio: 4 Practical Steps