The main goal of an investor is to make a profit, but how do you maintain your position when every investment carries a risk of up to 100%?
Even with 100% risk, investors have found a way to keep it down to 1-5% by creating an investment portfolio. Needless to say, one of the first rules of investing is not to put all your eggs in one basket.
Even if you have found an attractive project, business or other investment option, look for support right away – a few more investment options.
If you have 10 different investments in your portfolio, if you lose even two, the other eight will cover your losses and put you in profit.
If you have made the decision to invest, you need to create an investment portfolio.
What is an investment portfolio
Portfolio investing is built on the principle of diversification, i.e. dividing your investments into portions to control their risk while maintaining a return. This means that the investment portfolio is a set of investment projects.
A portfolio may include any number of assets, but it is important to understand that if there are too few of them, they will not adequately limit an investor’s risks, and if there are too many, they will be very difficult to manage and the quality of analysis of each individual instrument will decrease because it will be impossible to devote enough time to it.
Usually the portfolio is maintained for a long period of time with occasional adjustments due to changes in market sentiment and conditions: some instruments are added to it, others are removed, having fulfilled their function.
Where to start when creating an investment portfolio
The essence of an investment portfolio is risk diversification. If you have selected several investment options for yourself, it is advisable to allocate your capital proportionally.
You have 7 projects in your portfolio, in one of them you have invested 70% of the total portfolio amount. And it was this project, which you trusted the most, brought losses. The other 6 projects (30%) will not quickly restore the initial balance of the portfolio.
The only exceptions to the proportionality of investments are high-yield and high-risk projects, in which it is really better to invest a smaller amount. Such investments allow you to make large profits, but you will recover quickly if you lose them, as your contribution will be small relative to the entire portfolio.
The portfolio itself can contain investments of various kinds – trust management, real estate, metals, art and so on. Ideally, your portfolio should be as diversified as possible, but based on the age-old experience of renowned global investors, it is best to focus only on those investments in which you are knowledgeable and able to control yourself.
How to create your investment portfolio
If an investor is new to the market, you should initially create a small portfolio of 3-5 most understandable instruments and work with it for some time honing your analysis skills and trading discipline.
You should not try to use aggressive strategies and buy unstable assets at once, because lack of experience can lead to serious losses.
As an investor learns to adjust his portfolio to changing market conditions he can increase its volume and the number of instruments in it, gradually adding new assets and learning to work with them successfully.
You have to assess risks properly and diversify your portfolio accordingly.
If there are signs of an imminent crisis in the stock market, it is worth paying attention to other assets, which can compensate for the loss in case of unfavorable developments.
It is also best not to invest all of your money in shares of companies in the same industry as they can correlate strongly and that can lead to large losses in the event of a collapse.
To reduce the risk, it is advisable to build your portfolio around assets that are not correlated at all, i.e. they cannot influence one another. In this case investments will be protected even against serious industry crises or withdrawal of funds from certain market sections.But do not go to extremes and artificially inflate your portfolio.
No one is able to analyse a hundred different financial instruments from different market sections and still be able to spot undesirable changes in time.
High-quality analysis takes a lot of time, which makes it impossible to monitor the behaviour of a large number of assets simultaneously. That being said, timely portfolio management and proper analysis are one of the foundations for successful investing.