In this article, we will look at how to correctly form a balanced and diversified investment portfolio.
To do this, we will consider step by step how a full-fledged investment portfolio is formed:
Basic principles of investment portfolio formation.
Selection of fixed income assets for the investment portfolio.
The choice of risky assets for the portfolio.
Principles of working with risky and risk-free instruments in the portfolio.
Real modeling of an investment portfolio with full coverage of risks for it.
Principles of portfolio investment
One of the main tasks of investing is to obtain a stable and predictable return on the investment portfolio, and for these purposes, the investor has various tools.
It is impossible to realize this task with the help of just one instrument, whether it be the most attractive stock or the most stable and high-yield bond. What is needed here is a systematic approach to building an investment portfolio, where each type of asset plays its own role in the overall result of the portfolio.
From this point of view, it is necessary to single out the principal types of investment assets that just help to solve a difficult task in the investment portfolio, this is to ensure a more stable investment return, which significantly exceeds the most common form of savings - bank deposits.
Portfolio Investment Tools
All investment assets can be divided into several different groups, which differ from each other in the nature of the cash flow that the assets of these groups can bring:
Fixed Income Assets
The main criterion for such instruments is that the yield on them can be calculated with accuracy, and it is unchanged by a certain date in time. Whatever happens, the investor, provided that he has chosen a high-quality and reliable asset, receives the amount of the planned return. Therefore, these instruments are also called risk-free, since it can be assumed that the yield on them is guaranteed if the issuer is reliable and does not allow defaults. First of all, such instruments include bonds with a fixed or constant coupon. Bank deposits, of course, also belong to this class of instruments, but we will not consider them in detail within the framework of our today's article, since this is the most primitive instrument, which is inferior to bonds in all key investment parameters.
Fixed-coupon bonds are characterized by the fact that the specific coupon rate for them is known until the moment of their redemption, and redemption, if the issuer does not allow default, always takes place at 100% of the face value.
Bonds with a floating coupon occupy a separate place. On the one hand, this is still a fixed income instrument, but with a certain degree of uncertainty, since the exact future coupon rate for them is not known, it is usually tied to one or another macroeconomic or market indicator. Most often, this is the consumer price index or the RUONIA rate, or directly the discount rate of the Central Bank.
In any case, here we can say that these bonds in the investment portfolio perform a specific protective function - this is protection from a specific type of market risk, for example, inflation risk or interest rate risk. You can read more about how to use bonds of this type correctly in our article "".
In general, fixed income instruments play a crucial role in the investment portfolio, as they serve as the base or foundation of the entire investment portfolio, providing its unshakable fixed part of the growth, and at the same time, this profit should compensate for the risks of other, more risky instruments in the portfolio. Therefore, if an investor adheres to a prudent investment strategy, then fixed income instruments must be strictly present in his investment portfolio. And moreover, they should make up the majority of it in order to provide effective protection against risks at current levels of profitability in the market. It is also worth noting that at the moment fixed income instruments do not have the task of ensuring high, above-standard profitability of the investment portfolio, this task lies with the risky instruments of the portfolio. The task of risk-free instruments is to ensure basic stability and safety of the investment portfolio, as well as to cover risks.
Assets with conditionally constant returns
In fact, this is an intermediate class of instruments between fixed income and risky instruments. Also often such instruments are referred to as "Quasi-bonds". That is, in their essence, they are able to bring a fixed cash flow, but according to the principle by which they generate it, they are fundamentally different from bonds.
First of all, such instruments should include dividend stocks with a stable dividend yield and a transparent and definite dividend policy. However, it should be understood that by its nature, this is still not a bond, and this instrument does not have the degree of guarantee and stability of cash flow that bonds have. In addition, stock quotes are much more volatile than bonds and are unpredictable in their movements, therefore, along with a stable cash flow in the form of dividends, such shares can simultaneously incur losses in market value. The dividend policy is also not an obligation of the company, but only an official intention that increases the attractiveness of the company in the eyes of investors. Therefore, dividend payments, even if they have not always been historically stable, can be considered only conditionally constant.
In general, this class of instruments with a conditionally constant return may be present in an investor's investment portfolio, but it cannot adequately replace classic fixed-income instruments such as bonds. This class of instruments can only serve as an addition to the block of fixed income instruments and additionally enhance the protective qualities of the investment portfolio.
Also, this class of instruments is often called in a “softer” way - instruments with a high level of uncertainty. First of all, these are stocks. The essence of this instrument is that it has a speculative nature and a very large and sharp amplitude of quotes fluctuations. Moreover, in the short and medium term, this is an unpredictable process of fluctuations, which can bring both profit and loss. But in working with such tools, we can rely on long-term, fundamental factors that definitely have an impact on the formation of long-term stock trends. In this regard, we expect that the more time passes, the more likely it is that significant fundamental factors will work and quotes will change significantly precisely under their influence.
In general, the behavior of the stock in the short and medium-term horizons is little predictable and the stock can be at any point in the range. From the area of risks and losses to the area of profit.
It is impossible to say at what specific point in the price range the securities will be in a given period of time, but investors operate with long-term fundamental factors that help determine growth potentials and the level of risk for each individual stock, and the time factor. Since the more time passes, the more likely it becomes that the stock will be at the upper limit of its potential growth range. In our service, such ranges are calculated for all stocks.
The task of these instruments in the investor's investment portfolio is to provide increased, in excess of the standard yield, which should be many times ahead of the yield on fixed income instruments. Due to this, the total return on the investment portfolio turns out to be significantly higher than other available alternatives for capital allocation and, first of all, bank deposits.
Diversification of the investment portfolio
Many novice investors ask a very simple question, why, in principle, form an investment portfolio? After all, there is a group of attractive assets, and among this group there is the most attractive asset. Why not buy this single and strongest asset? But it's all about risk. It is from risks that the principle of portfolio investment is repelled, from their control and their minimization.
By purchasing one single asset, the investor fully assumes its risks, both the risks of this particular company and the risks of the entire industry, as well as global macroeconomic and financial risks. By purchasing already several assets, the impact of the risks of a single company in the portfolio decreases, as well as industry and sectoral risks. As a result, on the portfolio of an investor who has bought a sufficient number of assets, the risks of a single asset and even various industries are much less affected, which increases the stability of the investment portfolio to various patterns of fluctuations at times.
This "golden" investment rule is used not only by private investors, but by all the world's largest investment funds without exception. Some funds make the strategy of the widest possible diversification their main and priority strategy, bringing diversification to an extremely wide coverage, both in terms of the geography of instruments, and in terms of their types and number. In the famous Ray Dalio investment fund BridgeWater, the breadth of diversification of investment portfolios reaches more than 1000 different assets.
At the same time, the diversification of instruments in the investment portfolio should not be blind, but should be carried out according to the principle of selecting assets that have the least correlation with each other. The more such assets and the less correlation between them, the more stable and stable the investment portfolio becomes.
Also, in practice, for these purposes, along with the correlation coefficient, investors use , which in essence is a modified correlation coefficient and reflects not only the degree of correlation of an individual asset to the portfolio as a whole, but also its sensitivity to fluctuations.
At the same time, the diversification of the investment portfolio should be carried out in different directions, both in terms of a significant number of assets, and in terms of various types and classes of instruments.
In our personal investment practice, we also actively apply the principles of broad quantitative and qualitative diversification of the investment portfolio.
An example of a wide diversification of the public investment portfolio of a Fin-Plan company as part of the Annual Analytics Support service:
In this example, in our public portfolio, within the share of shares, we have implemented a wide quantitative diversification, the portfolio currently includes 34 positions for risky assets, and also implemented a qualitative diversification, according to various investment characteristics and indicators of instruments, as well as their ability to generate cash flow. The portfolio includes various investment ideas of undervaluation, investment ideas of long-term growth and development, as well as papers that generate a conditionally constant cash flow and papers that compensate for currency risks.
Also, the portfolio has been subject to broad sectoral diversification, which to a large extent allows to reduce sectoral and sectoral risks.
Principles of portfolio mechanics
So, summing up the theoretical part of our article, we can say that any investment portfolio has the task of obtaining excess profit, which would be higher than available alternatives for investing capital, and on the other hand, reducing the level of risk. At the same time, the investor has specific practical tools for solving both the first and second tasks.
For the purpose of obtaining returns in excess of available alternatives, the investor must use proven and studied mechanisms for choosing reliable protective assets and undervalued and promising risky assets. Moreover, this should be done not intuitively, but according to certain clear criteria and technologies. How to do this, we teach in more detail in our professional investment courses “School of Smart Investment”.
For the purposes of control and risk reduction by 100%, the mechanism of portfolio investment is used. If you look at the investment portfolio, there are three main types of risk:
the risk of a single company in the investment portfolio, this risk is also called non-systematic;
the risk of a single industry or company sector is an industry risk;
the risk of the global external and internal situation in the markets with which the company interacts. Debt market, capital market, money market, commodity market and so on. Such risks are also called systematic, as they affect the entire economic system as a whole and affect all companies.
The risks of a single company in the investment portfolio or even a single sector are effectively neutralized by diversifying the investment portfolio. If something happens to one issuer, it does not fundamentally affect the entire investment portfolio. Losses on one instrument are many times covered by the results on other instruments in the portfolio. The same applies to a single industry or sector of companies. First, sector-wide risks do not affect all companies in the sector in the same way, since we select companies that are slightly correlated with each other. Secondly, losses in one industry are offset by positive results in other industries and sectors. In this case, it is logical that the wider the degree of diversification, both sectoral and quantitative diversification in general, throughout the investment portfolio, the less impact the risks of a single company and the risks of the entire industry have.
Systematic risk, or it can be characterized as general market risk, cannot be neutralized by any degree of diversification. These are the risks of the global system, and they affect most markets and most companies. This is the case when neither the principles of correlation of various assets, nor the widest possible diversification, no longer work. These are the extreme external conditions in which all markets fall and all assets decline. The most striking example of the last decade is the global financial crisis of 2008.
Only the share of fixed income instruments can protect an investment portfolio from such a risk. These instruments are used by us by the maturity or offer dates, and if the issuer is chosen qualitatively and has a sufficient margin of financial strength, then the bonds bring their planned yield and provide cash flow, which means they compensate for the risks of risky instruments, regardless of how serious the risky happening. Risks are compensated even under the most negative scenarios for the fall of all assets. At the same time, the ratio of the share of risky and risk-free instruments in the investment portfolio is extremely important, and it should be built in such a way that the return on the share of risk-free assets effectively compensates for risks, in terms of the risky part in accordance with the acceptable risk for the investment portfolio as a whole.
Let's consider how risk overlapping is carried out in practice in a widely diversified investment portfolio.
For these purposes, we will use the service, where it is possible to quickly create a widely diversified investment portfolio and evaluate its risk and return profile.
In general, the portfolio consists of 15 positions in risky assets (stocks) and 61 positions in fixed income assets (bonds).
We have included stocks of companies that have good financial performance in the equity portfolio. The company's revenue for the last year has grown by more than 10%, while profits have also grown by more than 10%. The return on equity of these companies is greater than the alternative rate of return, that is, greater than the current average OFZ yield. And yet these companies are undervalued. That is, their current market value is less than their fair value calculated using the discounted cash flow method. The share of shares in this investment portfolio is 33.7%.
The share of bonds in the investment portfolio consists of 61 bond positions. The share of bonds in the structure of the entire investment portfolio is 65.9%, the share of cash in the investment portfolio is 0.4%. We have included the most stable and reliable securities in the bond portion of the portfolio: these are OFZs, subjects of the federation and municipal securities, as well as corporate bonds of the largest companies in the Russian Federation, which are high-quality and reliable borrowers.
With a given ratio of risky and risk-free assets in the investment portfolio, we get that even with the condition of realization of systematic risks, that all shares in the portfolio will simultaneously fall by the value of their calculated drawdowns, the yield of the bond part of the portfolio, due to the fact that it is guaranteed and fixed , will ensure full coverage of risks in the portfolio and ensure the break-even of the investment portfolio. At the same time, it should be understood that such an option, when the risks for all shares will come true at the same time, has a rather small probability. And even this low-probability risk in such a portfolio will be covered.
This is one of the basic and key principles of portfolio investment. At the same time, by changing the balance of shares of risky and risk-free instruments in the portfolio, it is possible to regulate the overall risk / return profile for the entire investment portfolio and customize it for the specific personal goals of each investor. For some, it is important to form an investment portfolio that is 100% protected from risk, and some investors are willing to put up with small temporary negative capital drawdowns for the sake of greater potential profitability. This is something everyone can decide for themselves.
conclusions
Successful investment is based on two main principles of work - this is the use of portfolio investment methods in work, which, first of all, allows you to reduce risks and keep them under control. And also on the principle of choosing high-quality assets, for bonds it is primarily the reliability and stability of the issuer, and for stocks it is the current market undervaluation of securities, as well as further prospects and growth potentials.
How to choose high-quality reliable bonds and promising stocks with high growth potential, we teach in our training program from scratch to professional level. Get started with a free introductory webinar. You can sign up using the link -.
Good luck with your investment!
By investing in the shares of one company, you risk 100% , that is, all your investment capital is completely dependent on one company. In order to reduce investment risks, it is best to create an investment portfolio of shares, where even with losses on 2-4 securities, the rest of the companies will stretch your total into a positive return.
The content of the article:
View the composition of a balanced investment portfolio of securities:
| Sector | Company |
|---|---|
| Technology | Micron Technology (MU) |
| Adobe Systems (ADBE) | |
| NVIDIA Corporation (NVDA) | |
| Facebook (FB) | |
| Nielsen (FB) | |
| Alphabet (GOOG) | |
| Cisco Systems (CSCO) | |
| Sales force (CRM) | |
| Services | Amazon (AMZN) |
| Alibaba Group (BABA) | |
| Time-Warner (TWX) | |
| Netflix (NFLX) | |
| Consumer goods | LOreal (OR.PA) |
| Berry Plastics Group (BERY) | |
| Colgate-Palmolive Company (CL) | |
| Volkswagen AG (VOW3.DE) | |
| Goodyear Tire and Rubber Company (GT) | |
| Davide Campari-Milano (CPR.MI) | |
| Carnival (CCL.L) | |
| Beiersdorf (BEI.DE) | |
| health care | Johnson & Johnson (JNJ) |
| Abbott Laboratories (ABT) | |
| Thermo Fisher Scientific (TMO) | |
| Allergan (AGN) | |
| Cooper Cos Inc. (COO) | |
| CVS Health Corp (CVS) | |
| Eli Lilly & Company (LLY) | |
| Raw material | Celanese Corp (CE) |
| Dow Chemical Co. (DOW) |
The return on a portfolio of securities largely depends on the one followed by the investor. You need to know not only what assets to build your stock portfolio from, but also how to trade and on the basis of what factors investment decisions should be made, where the main directions of strategies are -
- Buy and keep (buying large and dividend companies for a long time);
- Medium term investments (for 2-4 months under the influence of new changes in companies);
- Active trading (daily purchases/sales).
How a portfolio of securities is formed
The essence of any portfolio of securities is the reduction of risks, which is achieved by diversification - distribution. In simple terms, this means not putting all your eggs in one basket.
If there are 15 companies in your portfolio and 3 of them made a loss, then the rest of the securities are able to cover the losses. But not only the number of different shares plays an important role, but also the distribution of capital.
For example, you bought shares in ten companies, but invested 80% of the capital in one company. In this case, despite the diversity of the portfolio, your risk will be high.
It is believed that 70-80% capital should be invested in conservative and reliable companies, and only 20-30% allocate among the most promising, but with an increased risk of stocks. There can be no clear rules here, but the point is to protect yourself as much as possible from big losses.
The conservative part of the portfolio may include not only stocks of companies, but also bonds, Eurobonds, federal loan bonds, shares of mutual funds (UIFs).
Yes, this part of portfolio building is the most boring, but the result can be an 800% return in three years.
Your portfolio should include growth or key industries, and the strongest stocks from them.
For example, now it is impossible to ignore medicine. It's not just about growth, it's also about the prospects for the next 20 years.
If you look at the demographics of Russia, you will see that the population is aging:
In Europe, the situation is even worse. This means that there will be fewer and fewer people in nightclubs, while clinics will become more popular.
Poll: How many stocks do you have in your portfolio?
The structure of the securities portfolio consists of three types of shares:
- . High liquidity and huge capitalization. In addition to a solid reputation, these shares have other privileges. For example, the regulator has the right to stop trading if blue chips fall too quickly. The volatility of blue chip quotes during the trading day is characterized by moderate and unhurried movements. Examples: American Express Co. (credit services), AT&T (telecommunications), Boeing Co., The (aerospace and defense), Caterpillar, Inc. (agricultural and construction equipment), Cisco Systems (telecommunications), Chevron Corp. (oil and gas company), Coca-Cola Co. (the drinks).
- . Speculators do not use second tier stocks for intraday trading. However, the securities of such issuers may have hidden potential, and small liquidity may result in a sharp and prolonged exchange rate increase. Examples: Raytheon Company (rocket science), Honeywell International (defense), Tesla (electric vehicles), and Supernus Pharmaceuticals (medicine).
- . These are sectoral regional enterprises and companies, the main holders of which are municipalities or small private investors. Very low liquidity. Examples: Spetsgazremstroy, Tyumendorstroy.
If you think that building a portfolio requires huge capital, then this is not entirely true. Of course, it will not hurt, but you can start with the smallest, there is more than a minimum amount for opening a brokerage account, let's say for everything $200 . With this money, you can already buy shares of 2-8 companies.
Here you can create a complete portfolio of stocks from different industries and markets, for example, European, American and Asian companies:
How to create an investment portfolio of stocks from scratch
You can buy one share, the next month another, the third, the fourth one more, and the fifth month you can buy securities with the profit from the first four months. Your investments will start to work for themselves and in a year you can collect a sufficient portfolio of securities.
Portfolio management
First of all, you need to pay attention to what type of profit you plan to receive: investment or speculative.
In the first case, diversification of the stock portfolio plays a huge role. The more industries are arranged in an investment profile, the lower the risk.
The ideal ratio can be called such a portfolio of stocks, which repeats all the growing trends in the general index, but ignores its decline.
At the same time, it is better to allocate a large share for high-dividend assets. In the long term, interest accruals of redistributed profits will give the best result, compared to assets without dividends. Given the long-term investment, some of the funds can be allocated for promising second-tier stocks ( no more than 35%). Excess time will allow you to close any positions, regardless of their liquidity.
If speculative types of portfolios are considered, then only highly liquid assets will be the main instruments for trading. Positions need to be closed almost daily, so even a small liquidity deficit can result in a loss. In addition, with a high pace of transactions, the receipt of dividends fades into the background and you can freely choose those blue chips that do not pay them at all.
Poll: Your portfolio is designed for terms:
Poll Options are limited because JavaScript is disabled in your browser.
Long-term investments 54%, 290 votes
I don't have it yet * 20%, 108 votes
Medium-term investments 15%, 83 vote
Short-term investments 5%, 27 votes
Depending on specific stocks 5%, 26 votes
* - added by a visitor
Portfolio management is not limited to just assets, as capital also plays a big role, namely profit management. Let's say you made a profit, what to do with it farther?
Of course, it's nice to make a profit and spend it on yourself, but this would not be entirely correct, since it is better to divide the profit received into several parts:
- reinvest part
- set aside some on a financial cushion
- keep some for yourself as a reward
However, if you act like American pension funds, that is, you will fully reinvest the money, then in old age you will have nothing to worry about.
For example, after working 3-6 months at a good job in America, you will be offered to save money in a pension fund and will be given the right to choose: bonds, stocks, commodity markets, various risks ... but the bottom line is that after 20-30 years of work and these deposits, there is a huge capital that will work for itself. Thus, pensioners from developed countries do not deny themselves anything.
Look at a simple example if you nest $1000 under 6% per month and do not withdraw profits for 3 years:
The result will be a profit of 814%.
For example, over the past 2 years, stocks Amazon rose to 200% , for the last 3 years Adidas rose to 300% , the stock market allows you to earn this money.
Ready stock portfolios
Surely you have heard about stock indices like Dow Jones or CAC40, DAX… In the basket of these indices, the largest companies on the stock exchange are collected, already being ready-made portfolios.
It is the ETF ( exchange-traded funds) started copying baskets of all stock indices and selling their shares. You can buy one share of an ETF fund, which will have a specific portfolio in its assets. This is very similar to a mutual fund, but here you buy a share on the stock exchange and are not dependent on anyone.
What is an ETF
ETFs(Exchange Traded Funds), or, in other words, exchange-traded funds is an investment product that emerged at the end of the last century in the North American markets and has been rapidly gaining popularity around the world in recent years.
Shares of such funds are traded on the stock exchange on a par with other securities. The owner of each such share has a certain share in the total assets of the ETF, which, in turn, is represented by a certain portfolio.
By type of assets included in the ETF structure, there are:
- Index- such a fund buys all shares from a basket of a particular stock index. It can be 30 companies, such as a basket of the DAX index, or 500 companies of the S&P 500 index. Your ETF stock will include a ready-made portfolio of securities in one share of your ETF.
- Industry- focused on the shares of a particular sector of the economy, for example, oil production.
- Commodity– own futures for oil, gold, wheat, etc.
- Bond funds.
- Real estate funds.
- Reverse funds- a bet is placed on a fall in the quotes of a certain market.
- Synthetic– buy shares of other ETFs.
There are even very exotic ETFs - for example, a fund that owns shares in companies blacklisted by the Indian Ministry of Economy, or a fund that owns only shares of whiskey companies.
The broker provides a professional trading platform and the best conditions. Minimum deposit to open an account $250 .
Conclusion
- You can buy stocks yourself, it's no more difficult than buying a case for your phone in an online store.
- You can buy shares of different companies by building a portfolio.
- You can also buy a share of a ready-made ETF portfolio or mutual fund securities.
Since the variety is large - buy what is closer to you, what you know more about or would like.
Whatever you choose, the portfolio will always protect you, and its main goal is to reduce risks, so when choosing a portfolio, consider not only companies of the same type, but also different industries or directions.
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As the great Warren Buffett said, investing is a lifelong process. There are many securities from various sectors traded on the Russian stock exchange. You can invest in commodity and stock derivatives, buy mutual funds. Entering foreign sites increases the range of available tools. Here you can buy both stocks that are on everyone's lips (for example, Apple or Facebook), as well as more advanced instruments, such as ETFs. And that's not all!
How not to get lost in the variety of financial instruments and make money is one of the main questions for novice investors. To avoid mistakes, it is important to understand how to correctly form an investment portfolio, how to choose the best set of tools in accordance with your own goals, interests and capabilities.
"Study, study and study again". This phrase is attributed to V. I. Lenin. However, the idea is relevant for all time and is quite applicable to the investment process. In this review, we will try to formulate a general approach to the formation of an investment portfolio, as well as answer the basic questions of novice investors.
INVESTMENT VS. SPECULATIONS
As soon as you decide to enter the stock market, immediately decide what you will do - investments or speculation, or maybe both. Often these are two completely different things. As a rule, the term "investor" is used as the opposite of the word "speculator". So what is the difference between these seemingly similar terms?
Temporal moment. The investor usually focuses on long-term investments - over a year. A speculator can make many transactions daily.
Source of income. Investors are guided by the long-term fundamental growth of the asset. It is also possible to receive dividends, participate in the activities of the enterprise by voting at meetings of shareholders, etc.
Speculators profit from shorter-term fluctuations in the prices of financial instruments. It is possible to open both longs and shorts. As long as a long-term investor sits patiently with a position, a speculator can make good money on local market movements.
Selection of assets. In the case of long-term investments, fundamental analysis comes to the fore, which is necessary to assess the prospects of a company or other investment object. The investor invests in the securities of a particular company, which, in his opinion, is suitable for long-term investments.
For the speculator, the essence of the asset is secondary. First of all, he looks for situations in which you can make a profit on price changes. For a speculator, it is not so important what exactly to trade, the main thing is that there is a potential for growth in value on a suitable time horizon. Therefore, technical analysis is of invaluable help here.
Return and risk. Properly implemented speculative operations can bring great benefits. However, do not forget about the growth of risks, especially in the case of trading "with leverage".
So what is better anyway? There is no single answer. The long-term investor approach requires careful selection of assets in the portfolio. On the other hand, a speculator is often forced to closely monitor quotes during the day, making decisions much more often. Risk management comes first. This entails a somewhat greater psychological burden. In addition, the amount of money invested is important. With minimal amounts, it is easier to earn solid funds through speculative operations.
As practice shows, in the long run, the stock market is characterized by growth, because most companies develop, new "stars" appear. It must be understood that dividend payments, especially reinvested ones, are often an important source of income for a long-term investor.
Over long time periods, the divergence in favor of total returns increases. Let's look at the US stock market, where relevant statistics have been kept for a very long time. There, a prime example is the S&P 500 Total Return Index, which has gained about +1447% since 1990, compared to +730% of the standard S&P 500 (Reuters data as of 04/24/19).
In general, a mixed approach can be called optimal, when part of the funds is directed to long-term investments, and the other part to speculation. For example, in the ratio of 70 to 30. It all depends on the individual preferences of the investor, his budgetary and time constraints, the desire to respond to the short-term whims of the Master of the Market.
INVESTMENT PROCESS
As a rule, it consists of four key stages:
- analysis of the goals and limitations of the investor;
- selection of suitable tools;
- distribution of investments within the portfolio;
- portfolio evaluation and rebalancing.
Analysis of the objectives and limitations of the investor
Starting work in the securities market, the investor must clearly understand what he expects, as well as his opportunities. The goal can be either absolute (as a percentage) or comparative (for example, by so much more than the return on the MICEX index or a bank deposit). We can talk about both a significant increase in capital and its preservation. In any case, even an extremely ambitious goal should be realistic.
It should be understood that usually, the greater the risk, the greater the return. It is customary to separate an investor's inclination/tolerance for risk and his ability to take that risk. In the second case, we are talking about the limitations and life situations that an investor may encounter.
time horizon. The key parameter with which the investor must decide. A long investment horizon allows for higher returns. If you enter the market for a short time, then due to high volatility and possible unsuccessful entry points, your risks also increase, despite the seeming correctness of actions. It should be understood that conservative assets should be included in the same pension savings in case of unforeseen circumstances. Moreover, the closer the time of retirement, the greater the proportion.
Liquidity. If you have important expenses coming up in the near future, then you need to have a solid share of liquid assets in your portfolio, selling which you will not lose on market spreads. In addition, the high probability of an early withdrawal of funds from the portfolio should increase the importance of conservative instruments, which are not so subject to price fluctuations.
tax aspect. May influence the choice of instruments. It should be noted that Russian investors have access to Individual Investment Accounts (IIA), which allow them to receive serious tax preferences.
unique factors. For example, religious, ethical, country preferences of the investor.
Choosing the Right Tools
Any investment portfolio is a collection of stocks, bonds and other financial instruments. They differ not only in fundamental characteristics, but also in the degree of risk. As a rule, the higher the yield of an instrument, the greater the risks associated with it. The least risky are instruments close to the "cash" (short-term government bonds), the most risky are the shares of young enterprises, as well as futures.
Probably, a novice investor should listen to the recommendations of a broker. If you decide to trust only yourself, then remember a few key points:
- clearly define for yourself why you are investing;
- to begin with, it is worth investing in the types of business and tools that are most understandable to you;
- if you want to invest in a particular industry, focus on its leaders;
- when investing in outsiders, it is worth understanding the reasons for their decline, assessing future growth catalysts;
- give preference to liquid instruments - those that you can get rid of at any time. Examples are blue chips in the Russian stock market, S&P 500 components in the US;
- form your portfolio only from those securities that correspond to your level of risk;
- study, study and study again!
Distribution of investments within the portfolio.
Passive and active investments
As a rule, a passive approach to investing means following the broad market. The idea is simple - in the long run, it is difficult to get returns much higher than key benchmarks (for example, key stock indices). The investment process is carried out through purchases and long-term holding of ETFs or mutual funds.
Exchange Trade Funds are exchange-traded funds that invest in certain assets or their groups. In essence, they own underlying assets (stocks, bonds, commodity futures, foreign exchange, etc.) and issue shares on them. As the value of assets changes, so does the price of the ETF. Ideally, ETFs closely follow the dynamics of the portfolio.
ETFs are extremely diverse, only in the US market their number is about 1900. In terms of turnover for 2016, SPY papers, that is, an ETF that repeats the dynamics of the S&P 500, took the first place. comply with the principles of passive investment.
Active investing, on the contrary, involves the selection of individual financial instruments for the portfolio. Rebalancing - opening or closing positions - occurs much more often. It is possible to open shorts. In terms of commissions, this is a more costly undertaking. In addition, active investing takes more time. However, with the right approach, income can be more significant. Note that active investment is not necessarily speculation, investments can be long-term.
In addition, a combined approach is quite acceptable: investing part of the funds in a kind of stock index, and the other part in some of the most promising securities. In general, the passive approach implies a fairly serious diversification investments, allowing you to balance the risks.
Diversification vs. concentration
Diversification implies the ability to manage risk. Let's remember the statement of the founder of portfolio theory Harry Markowitz, "don't put all your eggs in one basket." There are two possible approaches to diversification. The first is in the narrow sense, that is, among the assets of one product group, one market or industry. The second is on a broad scale, that is, among different asset classes belonging to different markets or countries.
Ideally, the assets in a portfolio should be weakly or negatively correlated with each other in order to smooth out its fluctuations. Broad diversification in this sense is optimal. However, it is hardly worth investing in a certain asset class if these instruments look unpromising on your investment horizon.
If we talk about a portfolio of shares, then it makes sense to limit ourselves to about 5-15 companies from different sectors. The easiest way is to split the investment equally. A more conservative approach: place most of the money in liquid and stable companies, and the rest of the money in high-risk stocks. By diluting the portfolio with bonds, as well as foreign securities, you can get a fairly balanced set.
In reality, there is still no consensus on diversification. Charlie Munger, the famous partner of Warren Buffett, believes that it is enough to have shares of 3-5 companies in the portfolio. And Buffett himself, in turn, stated that "diversification is nothing more than a defense against ignorance." The mentioned stock gurus believe in a concentrated approach. They believe that there are not so many extremely successful investment ideas at any given moment. In addition, each person is able to fully, thoroughly understand a limited number of companies, which makes it difficult to build a high-quality, broadly diversified portfolio.
Which approach to choose is up to you. The amount of funds invested also plays an important role. Broad diversification requires large investments. This approach has its pros and cons. By minimizing risk, diversification inevitably limits potential returns. Next, we will look at examples of not too wide diversification.
There are three main types of portfolio according to the level of risk.
Conservative- the least risky. It consists mainly of stocks of large, well-known companies (blue chips), often rich in dividends, as well as bonds with high ratings. The composition of the portfolio remains stable for a long period and is less likely to be revised. This type of portfolio is primarily aimed at preserving capital, which does not exclude the receipt of a moderate income due to the increase in quotations, the flow of dividends and interest. Here is an example of such a portfolio:
Aggressive- includes stocks of fast-growing companies, speculative bonds, futures. Trading with leverage is possible. Portfolio investments are quite risky, but at the same time they can bring the highest income. Sample portfolio:
Moderate- combines the qualities of portfolios of aggressive and conservative types. It includes both reliable securities purchased for a long period of time and risky instruments, the composition of which is periodically updated. The capital gain is average, and the degree of risk is moderate. This type of portfolio is the most balanced. Sample portfolio:
Note that these are just sample portfolios. A more specific division depends on the personal preferences of the investor. If possible, it makes sense to dilute the portfolio with foreign (in particular, American) assets.
Bonus: Futures Portfolio Management Tips
In the book Technical Analysis of the Futures Markets, John Murphy gave some advice on how to manage money in a futures portfolio. Recall that futures are a high-risk financial instrument, primarily due to the presence of "shoulder".
- the total amount of invested funds should not exceed 50% of the capital. The rest should be placed in short-term government bonds or just cash.
- the total amount of funds invested in one market (for example, gold) cannot exceed 10-15% of capital.
- the total amount of guarantee fees paid when opening positions in one group of markets (for example, precious metals) should not exceed 20-25% of capital.
- the risk rate for each market in which the trader has invested should not exceed 5% of the total capital. We are talking about the amount that a trader can donate in case of losses.
One of the most frequent requests of novice investors is Therefore, today we will talk about what an investment portfolio is, we will analyze their main types and using real examples, let's see how to create an investment portfolio in stages.
- The concept of an investment portfolio
- Portfolio types
- Formation of an investment portfolio
- Examples of investment portfolios
The concept of an investment portfolio
In fact, an investment portfolio is not much different from a regular wallet, with the only difference being that in a regular wallet we carry banknotes and coins, and the investment portfolio includes financial instruments.
Successful investors know how to properly select and manage the assets in their financial wallet in order to get maximum profit with minimal risk of loss. In this they are helped by the distribution of funds between financial instruments and assets. This is due to the fact that if investing money in one financial instrument turns out to be unsuccessful and leads to a loss, then the rest will cover the loss and bring income.
Beginning investors behave a little differently. They, like a diamond, are looking for the very only source of passive income that brings them the maximum return on invested capital. And when they find it, they invest in it all the money they have, and sometimes even borrowed money (we remember those who suffered from cashberry). This option can bring excellent profits, provided that you have the abilities of Nostradamus and manage to withdraw money on time. If not, then this way of investing will add adrenaline and drive to life, but not money.
If you approach the matter of forming a financial portfolio wisely, then you should not focus on assets with maximum profitability. It is much more efficient to simultaneously combine risk-free investments with low returns and investments with medium and high levels of risk. In this case, the drawdown in profit from risky investments is covered by income from the rest.
Thus, an investment portfolio is a set of financial instruments (stocks, bonds, deposit and pamm-accounts, etc.) that are found in it in certain proportions that correspond to the goals. For example:
- 30% shares,
- 20% bonds,
- 25% bank deposits,
- 15% foreign currency,
- 10% pamm account.
Such a wallet generates income in the form of interest on deposits, paid dividends, exchange rate differences and trading in the stock market.
One of the main features of the formation of an investment portfolio is passivity, i.e. the investor does not take part in the activities of the companies whose assets he has acquired.
Types of investment portfolios
The types of investment portfolios are, for the most part, determined by the investment strategy. Almost always, the formation of an investment portfolio requires the simultaneous combination of several types of wallets, depending on the specific goals of the investor. In general, the following can be distinguished:
- Profitable.
Such a portfolio is focused on obtaining maximum profit with losses tending to zero. It is chosen by investors for long-term investment with a horizon of 15-20 years.
The main components of this type of portfolio are investments in state bonds, shares and bonds of large verified companies through. Such assets bring a systematic income of 19-25% per annum. Profit is generated from interest on coupon bonds and dividends on shares.
- growth portfolio.
The main income in the formation of this type of wallet consists of the difference in the price of buying and selling assets. Those. bought shares at 100 rubles per unit, the rate rose to 150 rubles, sold and earned 50%. Compiling a growth portfolio requires experience and certain knowledge from the investor. Its main goal is to receive a significant profit of 30-100% per annum. The main objects of investment are securities of companies with a forecast of rapid growth in the short and medium term. This also includes investing in startups.
The growth portfolio is characterized by a high level of risk, which can be reduced by systematic monitoring of market news and timely profit taking through the sale of assets.
- Optimal.
Assumes a moderate combination of return and risk. The formation of an investment portfolio of the optimal type consists, as a rule, from the shares of large and proven joint-stock companies, characterized by consistently high performance indicators over the past 5 years. It is allowed to purchase securities that are subject to a sharp movement in the rate, but subject to constant monitoring.
Adherents of the optimal portfolio are investors who invest for 5-10 years. Their main goal is to save money from inflation and a small stable capital increase of 10-15% per year.
- risky portfolio.
Suitable for investors who choose to trade in the forex market with the desire to get the highest profit. Consists of pamm accounts, trading accounts for copying forex transactions, cryptocurrencies, securities of famous brands, starting to issue shares (Pinterest, etc.). At the same time, you need to be prepared for rapid significant losses. Such risks are acceptable with an emphasis on profitability in the form of 300-1000%.
Classification of investment portfolios
- Long-term investment portfolio
Suitable for wealthy investors with substantial start-up capital. It is formed from the initial money and consists of the most risk-free assets (shares of monopoly companies, bonds, real estate, etc.). The investment period is 15-20 years. The essence of the portfolio is that assets are selected that do not require constant monitoring. The portfolio is checked and distributed once every 3-5 years.
The formation of an investment portfolio of this type brings allows you to earn 20-40% per annum. This type of portfolio investment is followed by large established investors, including the well-known Warren Buffett.
- Short-term investment portfolio.
This type of wallet contains assets with a short investment horizon from 1 day to 3-4 months. These are speculative investments in markets with high volatility - in Forex trading, cryptocurrency, hype projects. The profitability of such investments is high - from 0.5-1% per day. But the risk of losing money is close to 100%. Therefore, it is chosen mainly by investors with a small initial deposit to build capital and maximize profits.
- Narrow portfolio
In this case, assets are selected from the sector in which the investor understands the best. For example, for car enthusiasts, this may be the automotive area. The narrowly focused portfolio will consist of securities of automotive companies, divided into:
- stable and large
- With the prospect of rising prices,
- With a high dividend.
This can also include investing in a car rental business or recovery after accidents, buying cryptocurrencies on this topic at the IPO stage, purchasing rare and collectible cars, etc. The main thing is to choose an area that is close and interesting for the investor.
In fact, there are many more types of investment portfolios and they are rare in their pure unchanged form. For beginners, I recommend sticking to the first 2 types.
Formation of an investment portfolio
I am often asked about how to create an investment portfolio for an individual from scratch and how much money is needed for this. The answer is simple - just as there is no universal car suitable for every driver, there is no investment portfolio that meets the needs of every investor.
Forming an investment portfolio is easier than you think, although this does not mean that you do not have to spend time and effort. In any case, it is worth it, because the financial well-being of your family depends on it. Below are the 4 main stages of building an investment portfolio for those who do not use the help of a professional consultant and would like to try to create a solid investment portfolio on their own.
Accurate and thoughtful portfolio construction will allow us to achieve our goals and avoid disappointment due to erroneous investment decisions.
Step 1. Setting investment goals.
Before creating a portfolio, it is worth considering why we are investing and what we want to achieve. The more detailed the goals we set, the easier it will be to achieve them. Start setting goals by answering the following questions:
- How much money will we need in the future?
- What asset value do we already have?
- How long do we want to invest?
- How much capital can we put at risk? Would you like to achieve an average return of 8-20% without losing capital or receive from 25% per annum, but with the threat of losing part of the invested funds?
The goal may be: buying an apartment, car or cottage, vacation abroad or creating passive sources of income other than wages. The amount must be indicated in figures.
- Be sure to indicate the date by which we need the specified amount of money. Let's say I want to buy a car for 800,000 rubles. exactly 1 year later.
- Analyzing our initial capital– the amount with which you want to start investing. Let it be 200,000 rubles.
- We determine how much you need to invest monthly to achieve this goal.(800,000 rubles - 200,000 rubles) / 12 months = 50,000 rubles. That is, in order to buy a car for 800,000 rubles in a year. We need the amount of investment to increase every month by 50,000 rubles.
Conclusion: the formation of an investment portfolio should begin with setting goals. To do this, we need to know how much we want to achieve in a certain period of time, and calculate how much time and money we need to achieve this goal.
Step 2 Consider how much investment risk you can take.
Remember that investing is not a sprint, it's a marathon. Investments should be aimed not only at increasing profits to the desired size, but also at minimizing the level of risk and market fluctuations (inflation). The return on assets can change depending on many factors, which leads to fluctuations in the profitability of the investment portfolio. For this reason The recommended minimum investment period is 3-5 years. A long horizon will help reduce the impact of economic fluctuations on portfolio performance and clear your head of unnecessary emotions.
If you are not afraid of risk and accept temporary, even significant losses, and additionally invest in a long, at least 5-year horizon, then there is a high probability of achieving financial goals much earlier than planned.
For those who prefer a peaceful sleep, there are financial instruments with a lower level of risk, but offering a higher income than a bank deposit. For example, corporate bonds from reputable businesses, treasury securities, debt securities. These funds will become the basis for the construction of conservative wallets.
However, some investors will do better with a moderate profile of assets with varying levels of risk.
For shorter financial goals (from 5 to 36 months), a moderately aggressive investment strategy is used.
The answers to the above questions will allow you to choose the right investment strategy and the optimal distribution of assets.
For clarity, let's assume that we are starting to form an investment portfolio for teaching a child abroad - we need to accumulate 1,000,000 rubles. after 10 years. By investing 5333.33 rubles. per month for 10 years, the rate of return should be around +8% per year (after income tax). In a more realistic scenario, to smooth out inflation, it is recommended to increase the monthly installment to 5,700-6,000 rubles. to reach 1 million rubles. at the end of the investment.
| Year | Initial capital, rub. | Accrued interest, rub. | Total for the period, rub. |
| 1 | 64000,00 | 5120,00 | 69120,00 |
| 2 | 133120,00 | 10649,60 | 143769,60 |
| 3 | 207769,60 | 16621,57 | 224391,17 |
| 4 | 288391,17 | 23071,29 | 311462,46 |
| 5 | 375462,46 | 30037,00 | 405499,46 |
| 6 | 469499,46 | 37559,96 | 507059,42 |
| 7 | 571059,42 | 45684,75 | 616744,17 |
| 8 | 680744,17 | 54459,53 | 735203,70 |
| 9 | 799203,70 | 63936,30 | 863140,00 |
| 10 | 927140,00 | 74171,20 | 1001311,20 |
For an example with a car, it should be understood that in order to increase the initial capital by 4 times in 1 year, you will have to invest the bulk of the capital at 30-35% per month. And this implies the use of assets with the risk of loss up to 100% of the capital. This risk can be reduced by investing additional funds monthly. So, adding 10,000 rubles. monthly we will need to earn 150% of the deposit or 12.5% / month. Those. you can reduce risks by 3 times and use more conservative and secure objects for investments. We will analyze them in step 3.
How to make an investment portfolio
Formation of an investment portfolio step 3. Analysis of assets.
At this step, based on the given profitability and risk level, it is necessary to choose from the whole variety of objects for investment those that will lead to the set goal.
Components of the investment portfolio:
Let's start with the main conservative financial instruments that form the basis of a risk-free portfolio.
- Stock– allow you to achieve a 25% rate of return in the long term and partially hedge against inflation,
- Bonds– allow you to achieve 6-7% stable income and reduce the risk of the portfolio,
An investment portfolio consisting of stocks and bonds is exposed to monetary policy risk. However, this risk can be reduced by investing money through an individual investment account, which gives the right to receive an additional 13% through a tax deduction, but absolutely without risk.
- Bank deposits- are able to provide a yield of 7-10%, which covers the inflation rate by only 2-3%. But for the diversification of a conservative portfolio, taking into account the monthly capitalization of the received%, deposits remain relevant.
- Currencies of foreign states.
The most popular currencies that are not subject to inflation are hard currencies: the dollar, the euro, the yen or the Swiss franc. They have always strengthened against the ruble during times of poor economic conditions and stock market conditions. Therefore, having currencies such as the dollar or the euro in your wallet is now extremely reasonable.
Investing in foreign currency can be combined with investments in well-earning stocks and bonds of promising Russian companies.
- Precious metals.
According to experts, the Central Banks, through their policies in recent years, have strengthened the firm conviction of investors that there is no systemic risk and high stability of the financial system. As a result, insurance against financial market disturbances in the form of precious metals has lost its importance, popularity and price in recent years. In 2012, an ounce of gold cost $1,800, and in recent years it has fluctuated between $1,300-$1,450. The prudent investor should not pay attention to the temporary drop in the price of precious metals and even consider this situation as an opportunity to buy cheap insurance.
If investors come to the conclusion that central banks have stopped insuring the markets against a fall, the prices of gold and other precious metals will begin to skyrocket.
More aggressive and profitable investment objects include:
- Stock market.
This type of asset can be represented in many ways:
- Independent trading in the forex market,
- Copying trades of experienced traders through specialized platforms,
- Investing in pamm accounts.
This type of investment is attractive with a low entry threshold (from $ 10) and implies a large profit, but in combination with 100% risks. To reduce risks, it is important to work with trusted forex brokers who will provide free materials and a demo account for training. From myself, I can recommend the following reliable brokers:
These companies have been on the market for many years and show stable and reliable results.
- Derivatives– provide the opportunity to achieve very high rates of return and higher portfolio risk. These include options, futures and other derivative financial instruments. It is expedient to use them for diversification and hedging of risks.
- Alternative Investments- usually not very liquid, but they make it possible to achieve returns comparable to shares. These include: antiques, art objects, etc.
At first, it may seem difficult to analyze and understand financial instruments. At this step, many beginners make a mistake - after thinking for 1-2 hours, they go to the bank and transfer the money to trust management of the bank's analysts. Thus, they relieve themselves of the responsibility for managing their money and income. In case of failure, and this is over 50% of cases, they blame the bank for everything and calm down, consoling themselves with the money that they managed to save.
Take responsibility for your financial well-being, study the information and in 1-2 weeks, allocating 1-2 hours a day, you will be able to close the issue of distributing money within the portfolio on your own.
The allocation of assets is a very important element of the investment process, it allows you to achieve your long-term goals, as well as reduce the risk of the investment portfolio. For example, if you invest half your portfolio in stocks and half in treasury bonds, you will reduce the risk of the portfolio. Stocks will bring high returns in a good economic situation, and Treasury bonds during a recession.
In the case of a car, I conducted a complete analysis of assets with the calculation of profitability and risks in the article "". Everything is there in detail and in numbers, I recommend reading it.
Step 4. Selection of companies and assets for the portfolio.
The choice of assets for a portfolio is one of the most important parts in the entire investment process. If we decide to invest in stocks, we will have a fairly wide range of options. Hundreds of companies are listed on the trading floors.
There is several ways to choose the most profitable:
- evaluate companies independently based on an analysis of the company's financial and current reports,
- apply proven strategies for investing in stocks,
- use the analyzes and recommendations of brokerage houses. The disadvantage of this solution is that the analysis is prepared for a certain moment. After a couple of days, the analysis may be outdated, because information has appeared that has changed the forecast.
Do not rush to immediately distribute and invest all the money. Do it gradually. A good exercise against hasty investments can be an investor diary, in which you write in detail:
- why they chose the assets of this particular company,
- what profitability and by what time do you plan to receive,
- at what prices do you sell an asset at a loss if the price of an investment object starts to drive you into the red,
- at what price and profit will you fix the profit and close the deal.
Stick to these rules.
An important element in building an investment portfolio is diversification.
Diversification is the fragmentation of a portfolio between different assets. For example, instead of investing everything in one stock, it is better to invest in 5-7 companies. There are no perfect investors, even the most experienced make mistakes. Therefore, it is important not to rely on just one investment for a large amount.
Step 5. Monitor the portfolio and make changes.
Many investors, after the purchase, forget about investing. This is a big mistake. After investing, you need to constantly monitor the acquired assets. The market is alive, and new information is constantly emerging.
A stock in a company that seemed like a good investment yesterday may not necessarily be a good investment a month or six months from now. It is worth remembering this and constantly monitoring the market.
If we also bought stocks, which turned out to be valid investments and grew 50% last year, their share in the portfolio would increase dramatically. To maintain the balance of the portfolio, it would be necessary to sell part of the shares, and distribute the fixed profit in proportion to the collected wallet. This will help ensure an adequate level of diversification.
Investment portfolio management
An investor's needs, financial situation and therefore investment objectives may change over time. Changes also take place in the external environment, which affects the financial situation of the investor (increase in salary, loss of a job), which can improve or worsen. It means that the investment portfolio must be constantly monitored and changed. For example, in the event of financial problems, it is acceptable to withdraw some of the liquid funds.
Investment portfolio management after creation is a mandatory procedure for every investor. It includes:
- fixing the achieved profit and calculating the profitability,
- monitoring the risk level of acquired assets in accordance with the market situation,
- portfolio adjustment based on the results of the analysis of efficiency and achievement of the goal,
- keeping a goal diary.
Fixing the achieved profit and calculating the profitability
If you have carefully read the above information, then you have clarified the importance of establishing entry and exit points for assets. Any asset is subject to price changes. The dream of every investor is to buy low and sell high. But this happens very rarely. Therefore, depending on the goal, you should have specific figures for closing a transaction with profit or loss. If the profit target has been reached, fix it by completing the operation. Because after growth there is always a period of decline.
Even if it seems that the value of the asset will continue to grow, having reached the desired profit, fix it as close as possible to the profitability of the plan. It is better to leave some of the money and buy again on a rollback.
Same thing with loss. The loss to close is set according to historical support and resistance levels in each market. When you reach this level, find the strength to close deals and fix the loss. Believe me, it is better to get off with minimal losses and find a new investment object than to sit and watch losses grow in the hope that the market will go in your direction.
- Monitoring the risk level of acquired assets
The situation in the country and in the world is constantly changing: new laws are being adopted, additional restrictions and taxes are being introduced, competitors are appearing, resource prices are rising. Therefore, it is important from time to time to follow the news in the most important sectors of the economy in order to respond to changes in time - to buy or sell part of the assets.
- Making changes to the portfolio
Based on the results of the analysis, decisions will be made on making changes to the portfolio. Perhaps some financial instrument will not suit you in terms of profitability or risks, or you will find a more suitable investment object in the learning process. In this case, it is permissible to make changes to the portfolio. However, you should carefully monitor such changes in order not to allow a deviation towards risky assets or one instrument in violation of the risk allocation rules.
- Keeping a goal diary
This is an extremely important control. Keeping a diary for a long time will show you all the mistakes you make in behavior and help you draw the right conclusions.
In general, the formation of an investment portfolio and its management are inextricably linked with emotions, and the final result depends on them. Therefore, every investor requires the ability to control emotions.
Individual investors decide to invest and forget about them for a few years. As many studies show, the most common behavior is buying when an investor sees a good result and selling erratically when the markets are down. This leads to the fact that instead of profit people are left with a minus. Wise investing is the opposite, i.e. following the principle of "buy low and sell high". Try to view the fall as a buying opportunity. It must be admitted that there are long-term downward trends, but it must be remembered that they are not eternal.
Diversification of the investment portfolio
The main factor affecting the value of investments is risk, and the main tool for reducing risk is risk diversification or portfolio allocation.
The essence of diversification is the purchase of assets in the portfolio, in the hope that a possible decrease in the value of some of them will be offset by an increase in the value of others.
Types of diversification:
- quantity (buying shares of various companies in the portfolio - the more the better);
- industry / sector (purchase of assets from various sectors of the economy, for example, shares of banks, construction companies),
- purchase of assets from various market segments (for example, stocks, bonds, real estate, shares of investment funds);
- international (purchase of geographically differentiated assets, for example, shares of different countries);
- purchase of assets of small and large enterprises.
By investing in various financial instruments, the investor distributes risks. If one asset makes a loss, then the profit on another compensates for this loss. As a result, the investor will not lose in profit or lose less.
An example of an investment portfolio for 2019
Let's take our example with a car and, depending on the strategy and goal, we will distribute it among financial instruments with the calculation of profitability. This will allow us to choose the most suitable investment style in relation to risks.
- Conservative portfolio
It includes money market instruments that offer the lowest risk and highest liquidity: stocks, bonds, bank deposits. It is these instruments that make up the bulk of the portfolio - up to 75 percent of the total investment.
- 100000 rub. (50%) we invest in Russian stocks and bonds in a 50/50 ratio. In this case, the average yield will be 13-15% per annum.
Traditionally, government bonds are the most reliable, but bonds of large and long-term stable companies can also be used to increase yields.
In the calculation, I took into account only the yield on bonds and the amount of dividends. If you analyze the market well and buy stocks with the prospect of growth, you can earn more.
It would be more profitable to do this through an individual investment account (IIA), which would increase the yield by 8-10%. But you can’t withdraw money from IIS for 3 years, and our goal is to buy a good car in a year.
- 45000 rub. we make a deposit in a bank with interest capitalization. The profit will be 6-8% per annum. The deposit will be the most liquid part of a conservative portfolio, so try to choose a rate with minimal losses in case of early withdrawal.
- 25000 rub. will be used to buy shares of foreign companies. Dividends on securitiesforeign companies many times less than in Russia. In this case, the emphasis is not on the size of dividends, but on the growth in the price of the shares themselves. If you take it seriously, the average yield will be above 25%.
- 15000 rub. we invest in proven brokers with a yield of 3-5% per month or copying Forex transactions. I recommend a broker for copying.
- the remaining 15,000 rubles. convert to cryptocurrency through exchangers. You can choose promising cryptocurrencies with a yield of 70-100%.
The formation of an investment portfolio of a conservative type primarily meets the objectives of:
- protection of assets from inflation,
- getting a small return.
As you can see, the average yield of a conservative portfolio will be up to 30% per annum. This will prevent us from buying a car in 1 year, so let's look at other types of portfolios.
- Progressive portfolio
The progressive portfolio includes stocks, bonds and money market instruments that provide an opportunity to make a profit while keeping the risk at an average level. About half of the total value of investments is invested in stocks, bonds and mutual funds, and the remaining 50 percent is distributed between the forex market and cryptocurrency.
An example of a progressive investment portfolio for 200,000 rubles:
- 75000 rub. send to Russian securities (stocks and bonds),
- 25000 rub. in mutual funds with a yield of 20% per annum.
This is the most conservative and protected part of our portfolio, with a yield of about 20 percent. We will earn most of the money through the following financial instruments:
- 25000 rub. - shares of American companies. Do not look at newcomers, choose giant companies that produce goods that are in high demand (Apple, etc.),
- 35000 rub. – copying Forex transactions and pamm accounts. Choose conservative traders who have been on the market for 1-2 years. Profit will be 3-6% per week or 12-24% per month.
- 40000 rub. - for the purchase of cryptocurrencies. Distribute them between bitcoin, ether and other coins with the largest capitalization. Cryptocurrency has a high volatility. Therefore, when buying, immediately determine the levels of support and resistance and regularly follow the news.
The return on this portfolio will be about 50% per year, with almost 50% protection. Generally acceptable, but also not enough to buy a car.
By the elimination method, it turned out that in order to receive 150% per annum, it is necessary to collect a dynamic type of investment portfolio.
- Dynamic Portfolio
Those who want to get more profit should invest in instruments with a higher risk. In this case, the share of risky investments in the portfolio reaches 70-80%.
Formation of an investment portfolio of a dynamic type:
- 100000 rub. – in copying transactions in the forex market or independent trading in the stock market.
This asset, taking into account the reinvestment of 60% of the money earned, is able to generate income of almost 200,000 rubles. with an average monthly return of 5%.
| Period, months | Initial investment, rub. | Income per month | Total, per month |
| 1 | 100000,00 | 5000,00 | 103000,00 |
| 2 | 103000,00 | 10300,00 | 113300,00 |
| 3 | 113300,00 | 11330,00 | 124630,00 |
| 4 | 124630,00 | 12463,00 | 137093,00 |
| 5 | 137093,00 | 13709,30 | 150802,30 |
| 6 | 150802,30 | 15080,23 | 165882,53 |
| 7 | 165882,53 | 16588,25 | 182470,78 |
| 8 | 182470,78 | 18247,08 | 200717,86 |
| 9 | 200717,86 | 20071,79 | 220789,65 |
| 10 | 220789,65 | 22078,96 | 242868,61 |
| 11 | 242868,61 | 24286,86 | 267155,47 |
| 12 | 267155,47 | 26715,55 | 293871,02 |
It is quite possible to maintain this percentage if you carefully analyze the work of the traders you are going to copy.
For those who consider it risky, any additional income will do, allowing you to save 10,000-15,000 rubles. monthly (renting a garage or an apartment or a mini-business with high profitability). The main thing is that the yield is at least 5-10% per month. or 150-200% per year, taking into account the reinvestment of most of the amount.
- 50000 rub. – in crypto-currency with partial hedging of Forex risks. I advise you to distribute in 7-10 virtual currencies.
- 50000 rub. – into a growth portfolio filled with foreign and Russian stocks based on the increase in their cost in the next 3-6 months.
The return on this portfolio will be:
| An object investment | Initial investments, rub. | Average return in % per year | income per year, |
copying trades, | 100000 | 200 | 200000 |
| Cryptocurrency | 60000 | 85 | 51000 |
| Stock | 40000 | 25 | 10000 |
This portfolio requires enhanced control every 1-3 days with redistribution every week and partial reinvestment of money back into investments. First, reinvest 60-70% in high-risk investments and 40-30% in stocks and bonds. Gradually, upon reaching the plan, transfer money into conservative financial instruments (deposits, government bonds, foreign currency, etc.). Just remember to maintain a balance in asset allocation.
Profits from cryptocurrencies and stocks in the table are calculated without taking into account reinvestment. I advise you to reinvest in cryptocurrency no more than 10-20%, because. the risks of loss are high. It is better to supplement the portfolio with securities.
As you can see, the formation of an investment portfolio with a competent approach and control allows you to earn 800,000 rubles. per year with initial capital 4 times less. But this is risky and for beginners it is better to stick to a progressive portfolio and keep the capital protected by at least 50%.
Share your features of the formation of an investment portfolio in the comments, ask questions, subscribe to updates and social networks. I wish everyone to achieve their financial goals.
My stock portfolio is already six months old. I openly post the results of this portfolio, but deliberately try to hide its composition so that newcomers do not have the desire to copy it. Because copying someone else's portfolio, not tested by time and collected by a person who does not have sufficient practical experience, often leads to large financial losses.
Nevertheless, there are more and more questions about this, and I will try to describe in general terms how I built my portfolio. Once again reminding the reader that my selection criteria may be erroneous.
Why didn't I use index funds or trusts?
The reason that I decided to form and manage my portfolio on my own is very simple - the analysis of disappointing statistics. A few facts to keep in mind before investing:
- 96% of active managers cannot outperform the index in the long run. And the composition of those 4% that still outperform the market is different at different time intervals. Guessing future winners is similar to playing roulette and is not a method that I, as an investor, plan to practice.
- Even small additional commissions and taxes can eat into a huge portion of future profits. Thanks to , paying one extra percentage could result in us losing millions of dollars in profits in the future.
Based on these two conditions, I came to a fairly logical conclusion for myself.
- As a beginner, it makes no sense for me to believe that I can beat the index, since the vast majority of professional managers fail to do so.
- I need to pay as few commissions and taxes as possible to get significantly better results.
Index funds also talk about this, calling for investing in them. Naturally, on average, the results of investors cannot be better than the market, because all together they are the market, and additional contributions make investing a game with a negative mathematical expectation.
But I went even further. If the important thing for an investor is not to beat the market, but to reduce costs, then why pay additional commissions to index funds? Isn't it easier to build your own index and build it after a certain period of time?
