How to Build an Investment Portfolio. Tells a personal broker

The second principle of building a portfolio is to avoid investing in assets, which you are not good at. The more you stick to this rule, the better result you will see at the output.

60/40 – works or not

Let's analyze the construction of a portfolio using examples. The most common asset allocation looks like this: 60% Shares, 40% bonds. The simplest strategy in this case is to 60% buy broad market index, and on 40% - index of corporate and government bonds. With such a portfolio, rebalancing needs to be done 1 once a year. Despite, that the strategy seems naive and even clumsy, she works.

How to increase profitability and reduce risk

Now let's try to complicate the contents of the portfolio., to reduce risks or increase profitability. Long-term bonds should bring higher yields, as their holders are at greater risk. But in reality, the yield on bonds weakly depends on the term, therefore, long-term bonds can be easily replaced with short-term bonds. This way we will reduce portfolio risks.

Another option is to add more foreign stocks to the portfolio.. For example, except for index S&P 500 invest in the indices of companies in other developed countries: Europe, Australia and Asia, so that the ratio of securities turned out 30%/30%. Thus, we will reduce the risk through diversification and increase the portfolio's profitability.. This seeming magic is due to the low correlation of these indices with US stocks..

If you go further, you can dilute the shares of large companies in developed countries, of which indices are composed, small company shares. For example, bring the portfolio to this ratio: S&P 500 — 15%, shares of small American companies - 15%, shares of companies in other developed countries - too 15%, And 15% shares of small foreign companies. Such a distribution improves diversification and increases profitability..

The process of building a portfolio can be continued further, including emerging market assets, or, for example, real estate. The usefulness of the added asset classes is determined by the, how much they reduce risk or increase the return on your portfolio.

Next time we'll talk about portfolio tactics.

If you have a portfolio of securities with a value of 3 RUB million, we recommend conducting an audit - it's free. You will receive a professional opinion from a personal broker, based on analytics from Argus Research and BCS Global Markets.

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