4 steps to build a profitable 2020 investment portfolio

4 steps to build a profitable 2020 investment portfolio
Creating an investment portfolio according to sound fundamentals is central to the success of any investor in the money market today. As an individual investor, you should learn to divide your assets in a manner consistent with your investment objectives and your ability to bear risk. In other words, your portfolio should generate the largest possible return with the lowest possible risk, and not be of concern to you.
In general, the formation of an investment portfolio aims to maximize wealth by increasing the benefit, in addition to reducing the size of the risks that the investor may face, but the problem at issue is how to determine the optimal composition or combination of the portfolio's assets according to the return and risk criteria?

A successful investment portfolio in 4 steps

By following systematic approaches, investors can build portfolios that are compatible with specific investment strategies. Here are four steps to help you build a profitable portfolio in a systematic way:

1. Determine the appropriate asset allocation method for your situation.

Verifying your financial position and goals is the first task in building an investment portfolio, and the important elements to take into account include age, the amount of time available to you to develop your investments, as well as the amount of capital you will invest and your future income needs. An unmarried university graduate who is starting his career needs a different investment strategy than a person at the age of 55, and wants to pay the expenses of university education for his children, and to save a reliable amount after his retirement within 10 years only.
The second factor to consider is your personality and your ability to take risks. Would you like to risk losing some money for the potential for greater returns? Everyone wants to achieve high returns year after year, but if you are constantly concerned about the decline in the value of your investments in a short period of time, the desired high returns will not be worth all the stress and tension in such cases.
Clearly identifying your current position, future capital needs, and your ability to tolerate risk will determine how you should divide your investments between the different asset classes. The potential for greater returns comes at the cost of taking on greater risk of losses (a principle known as the risk / return swap) - the goal is not to completely avoid the risk factor but to exploit it to suit your circumstances and your investment style. For example, a young person who does not depend on his investments for a steady income can take greater risks in his pursuit of higher returns. On the other hand, a person approaching retirement age should focus on protecting his assets, obtaining income from these assets and pursuing investment plans that feature tax benefits that ensure payment of the lowest possible taxes.
Conservatives Investors vs investor and n the irreverent .
The more risk you can take, the more impulsive your portfolio will be, and the greater part of your investment is directed towards equities, and the lesser part is for bonds and other fixed income securities. On the contrary, the less risk you can take, the more conservative your portfolio will be. Here are two examples: one for a conservative investor and the other for a moderately impulsive investor.
Conservative portfolio
  • 70-75% fixed income securities.
  • 5-15% in cash or its equivalent
  • 15-20% shares.
The primary goal of a conservative portfolio is to protect its value, and the distribution pattern described above will result in steady income from bonds and provide some long-term capital growth potential from investment in high-quality stocks.
Relatively aggressive wallet
  • 50-55% shares
  • 5-10% cash or its equivalent
  • 35-40% fixed income securities
A relatively leveraged portfolio is suitable for medium risk tolerance, and attracts those able to take more risk in their portfolios in order to achieve a balance between income and capital growth.

2. The stage of creating an investment portfolio

Once you have determined the appropriate asset allocation method, you will need to allocate your capital among the appropriate asset classes. At the initial level the distribution is not difficult, stocks are stocks, bonds are bonds.
You will need to divide the underlying asset classes into subcategories with specific risk and return ratios. For example, an investor may distribute the equity-related asset class by creating a mix of companies and emerging markets to balance between small companies with significant growth potential and companies with larger and more stable businesses, and between domestic and foreign stocks. The asset class of bonds can be divided between short-term and long-term bonds, between government and corporate debt, and so on.There are several methods you can use to choose the assets and securities that fulfill your asset division strategy (you will need to analyze the quality and potential of each investment you buy, as bonds and stocks are not equal).
* Stock selection - choose stocks that fulfill a level of risk you can tolerate in the stocks section of your portfolio. The stock sector, market value, and type of shares ... are basic factors that you must take into consideration. In a first stage, create an expanded list of potential companies and then filter it using stock screening tools (programs that help filter stocks according to a wide range of criteria) to get a shortlist. In the second stage, you must conduct an in-depth analysis of each potential stock to determine its opportunities and risks in the future. This is the stage that requires the bulk of the work when adding securities to your portfolio, and it requires you to regularly monitor changes in the prices of your investments, and to follow up on the latest news of your stock companies in particular and sectors in general (for more information, read “4 steps to choosing a stock”).
* Choosing a bond - there are several factors you should take into account when choosing a bond, including coupon value, maturity date, type and evaluation of the bond, as well as the general interest rate environment.
* Mutual funds - Mutual funds are available in a wide range of asset classes, and allow you to buy stocks and bonds that fund managers have conducted professional research on before selecting them. The fund managers will, of course, charge fees for their services, which will reduce your returns. Index mutual funds are another option, and their fees are lower because they reflect an already existing index and are therefore inactive management.
* ETFs - a good alternative if you don't want to invest in mutual funds. ETFs are, in essence, mutual funds that trade like stocks. They are also similar to mutual funds in that they represent a large basket of stocks - grouped by sector, capital size, country, or the like. However, they differ in that they are not actively managed, but rather that they follow a specific index or other basket of stocks. And because they are managed passively, ETFs offer cost savings compared to mutual funds, while providing diversification at the same time. ETFs cover a wide range of asset classes as well and are useful in complementing and diversifying your portfolio.

3. Re-evaluate the portfolio.

After a portfolio is formed, it must be rebalanced periodically, as market movements may cause a change in the initial values ​​of your investment. If you want to assess the actual distribution of assets in your portfolio, quantify the investments to determine their value compared to the total investments.
Other factors that are likely to change over time include your current financial situation, your future needs, and your ability to take risks. If there are changes in these factors, you will need to adjust your portfolio according to the new changes. For example, if your risk tolerance decreases, you may need to reduce the amount of equity in the portfolio. Or, you may become willing to take a greater risk, and thus you may allocate a small percentage of your assets to high-risk small company stocks.
If you want to perform rebalancing, determine which asset class has increased or decreased its percentage. For example, let's say you put 30% of your current assets investment in small or emerging company stocks (higher risk), when you are supposed to only allocate 15% of your assets in this category. Rebalancing determines how much you need to reduce in this category to allocate to other categories.

4. Rebalancing the portfolio in a strategic way.

Try to maintain the asset allocation that you have chosen in your investment strategy until you feel that the time has come, based on the data of your aging or changing financial situation, to change this distribution. Among the requirements to continue your strategy to distribute existing assets, you have to rebalance your portfolio, or re-allocate it completely from time to time.
When you decide that the time is right to rebalance your portfolio, there are several techniques to do so:
* You can sell part of the type of investment asset whose value has increased significantly, and reinvest its profits in another asset that has not yet increased.
* You can change the way in which the new investment funds that are added to the portfolio are distributed by placing them in other types of assets whose prices are still below their fair values, until the investor reaches the distribution that suits him.
* You can raise the capital of the investment portfolio, and allocate the increase to fully invest in assets that are still below their fair values.
Use the method we discussed in Step 2 to select the securities when creating a portfolio for the first time.
Note that when you sell assets to rebalance your portfolio, this will have tax ramifications that will reduce your returns. At the same time, you must be thinking about the future of your investment. If you were to expect the overgrowth of leaves close to collapse, selling them is necessary despite the tax implications. Analyst Opinions and Research Reports are useful tools to help gauge the future of your investment.
* Remember the importance of diversification
It is very important to remember the importance of diversification and the need to maintain it during the entire investment portfolio building process. Not only is it sufficient to have securities in every asset class, you need to diversify into each class as well. Ensure that your investments in a particular asset class are divided into a variety of subcategories and sectors.
As mentioned earlier, investors can achieve excellent diversification by using mutual funds and ETFs. These investment vehicles allow individual investors to benefit from the economies of scale that managers of large mutual funds enjoy, which the average person will not be able to achieve with a small amount of money.
Generally speaking, a portfolio that is well diversified is your best chance to increase the growth of your investment in the long term. It protects your assets from the risks of big downturns and structural changes in the economy over time. Monitor your investments closely, making adjustments when necessary, and you will increase your chances of achieving significant financial success in the long term.

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