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Personal brokers help you figure it out, how to form a long-term portfolio and not be distracted by news noise. You can read previous articles by tag. Let's talk today, how to build an investment portfolio.
On the tariff, a Wealth Management Consultant, a personal broker is the one, who provides professional investment support: prepares a financial plan for the client, helps to form a portfolio and accompanies all the way of investing towards achieving goals.
Arthur Bedzhanov, Personal broker
When building a portfolio, we must understand, that there are not so many factors that we can control. We want to plan investments taking into account future events, but in reality, there is little we can predict. In retrospect, any strategy will have its drawbacks.
Therefore, the main task of a long-term strategy is to lead the investor to a certain financial result with the least risks.
In the short term, any portfolio will periodically seem "wrong" to us, and we will want to change the strategic decisions we have made. For example, during periods of a growing market, you will want to have more stocks in your portfolio, and during periods of decline - more money.
Principles of a good portfolio
The first principle of building a good portfolio is to select only liquid assets. So that, if necessary, we can sell part of the investment within a week. This means, what diamonds, rare coins, silverware and antique cars will have to be eliminated. Besides, it is worth giving up specific instruments like futures and options. They are suitable for speculation, but not for a long-term portfolio.
Another asset class, which should be treated with caution is gold. Many include gold in their portfolios due to low correlation with other asset classes. But the best result is gold, usually, shows in times of crises, when securities get cheaper.
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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