The Basics of Portfolio Creation I Investing 101 I Kristal.AI

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What is a Portfolio and How to Create One?

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As a potential investor, you’ve probably come across the term portfolio a few times during your research. A portfolio essentially is an accumulation of all your investments.

A diversified portfolio is one that contains many investments, high and low risk, so that you can enjoy different types of results over the period of your investment journey. Creating a portfolio is not as simple as it looks. Investors must take into account multiple factors when deciding the types of investments they want to include in their portfolio. In this article, we will take you through the main steps of creating an investment portfolio:

Begin by Understanding Your Asset Allocation

A successful portfolio is not a mere collection of investments, it is one wherein each and every investment takes your goals into account. Hence, before you start investing, you must understand your goals, both long term and short term ones. While doing so, it is also very important to take an honest evaluation of your financial situation and make investments accordingly. Different funds require different monthly or yearly investments, and knowing whether you can cut extraneous costs from your life in order to invest your money can help you make wiser choices.

While determining your asset allocation, you must understand your own risk profile. Are you willing to take a higher risk in order to gain higher ROIs? Would you prefer the safety and security of a low-risk investment?

Ultimately, your risk profile will go a long way in determining whether you want to build a conservative or an aggressive portfolio. This, in turn, determines your asset allocation strategy.

What is the difference between a conservative and aggressive portfolio?

A conservative portfolio is one that is more focused on preserving the funds that are invested in it. Thus, it will have a lower percentage dedicated to the equities market when compared to a more aggressive portfolio. Consider the diagrams below for clarity:


Building your portfolio

When building your portfolio, you must consider the different types of investments that you can choose in order to make your money grow. You must also understand the asset classes that you want to pick. In order to pick the right assets for your needs, you can do the following:

  • Stock picking: In this process, you can research different types of stocks available to you and pick the ones that align with your risk profile the most. Stock screens can help you determine the right types of stocks that you should be shortlisting. This is the stage of building your portfolio during which you must exercise your ability to analyse the risks of each individual stock. If this is something that you are new to, then you can always ask for help from a financial advisor. This part of investing does require an active approach wherein you need to stay on top of price fluctuations.
  • Bonds:  When picking out the right bonds, you must have a look at the maturity, coupon, interest rates, and rating of the bond. You must also look at the bond type. These factors can help you determine which assets to invest in.
  • Exchange Traded Funds: ETFs are another viable alternative to mutual funds as they trade stocks. They offer great scope for diversification for the investor and are good options for those who want a passive management strategy.

Tweak Your Portfolio, As Needed!

Now your role as an investor does not stop once you have invested in the funds you’ve selected. You must also keep an eye on your funds as changes in the market can disrupt the balance you’ve created within the portfolio. This means that you must periodically tweak and rebalance the portfolio, as and when it is needed.

Apart from that, you may find that changes in your lifestyle or financial situation are compelling you to change the way your portfolio is balanced. Everyone’s needs evolve with time, and your portfolio should allow for some flexibility in that regard. If you feel as though a certain asset class is over weighted, you can then rebalance your portfolio accordingly by redistributing your funds to other assets. For instance, let’s say you started off with a conservative approach and have now reached a point where you would like to increase the risk you are taking. You can always add more funds into the equities market by reducing the funds in safer assets, like the debt market.

Always Rebalance With a Strategy In Mind

When you are thinking of rebalancing, don’t just consider your new needs. Consider the implications of rebalancing on your portfolio. Many novice investors forget to consider capital tax gains when investing, and this often cuts into their earnings. So, have a look at the specific tax implications of each and every one of your investments and then sell off the stocks you do not want accordingly. Of course, if you feel that selling certain stocks will be more beneficial than saving on the tax you’ll have to pay by selling them, then by all means, go ahead. Just be clear about the strategies you are employing to meet your goals.

In Conclusion

Building a successful portfolio requires thought and you must analyse each and every one of your investments rigorously before you invest. As someone new to investing, you might find this process daunting, which is why it is more beneficial to build your investment portfolio slowly over time, rather than rushing into making a ton of investments quickly. Allow yourself the time and space to grow and learn before diversifying or rebalancing anything. Of course, if your advisor tells you to do something specific, you should certainly take that into consideration too!