Putting a portfolio together
Make sure you know the score before you invest
The sheer volume of financial market assets on offer today can make the task of assembling a portfolio overwhelming.
Diversification has always been the maxim of prudent investing – put all your eggs in one basket and you could end up losing them all. But spreading your capital across several asset classes, and across a variety of individual instruments within those sub-groups, is a tried and trusted investment strategy.
Making that initial choice to diversify is the easy bit but selecting the asset categories and more specifically the weight (or percentage of the total basket) allotted to each one is a little trickier. One initial step involves a rigorously honest self-assessment that addresses three key issues:
(A) Your financial robustness – what percentage of your capital can you afford to lose (however temporarily) if things turn bad?
(B) How much do you value your own sense of security? Are you willing to accept a lower rate of return for the relative safety and reliability of government bonds, or are you quite happy to sacrifice that security blanket for the possibility of far greater returns from a more volatile asset class, say, emerging market corporate bonds?
(C) Finally, you should also consider your investment horizon, assess which instruments you’ll be keeping long term and which you will need to adjust as market conditions change.
Most investors are subconsciously drawn towards the familiar and for many this means shares in the companies and brands they read about every day in the financial press. But it’s always worthwhile to dig in and try to understand unfamiliar instruments, be they in a far-away market or of a type you’ve never previously considered. Research, research and research again.
Check out company earnings reports and outlooks and scout around for analysts’ assessments of the company itself and the broader sector within which it operates.
Keep on top of the financial news, as well as the broader political news for insights into government policy changes that may impact your investments. For example, a government push for more green energy should be good news for companies in the renewables space (but watch out for those with outdated or unsuitable technologies). Thorough preparation will make task of assembling your portfolio far easier, and also that little bit more bulletproof.
Expect the unexpected
Sudden, unpredictable and often violent events are an intrinsic part both of the human condition and the investment process. The classic example here is the Kobe earthquake of January 1995, which cost thousands of lives and caused $200 billion of damage to buildings and infrastructure. Japan’s Nikkei 225 index plunged 7.6%, eventually leading to the demise of Britain’s famed Barings Bank.
If anything underlines the value of diversification across geographies and asset classes and hedging your risk through variety, this story does. Anybody overexposed to Japanese assets back in early 1995 was not in a good place the day after the earthquake. Those with finely tuned, diversified and properly hedged portfolios, fared far better.
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Quarterly Outlook Q2 2022
Quarterly Outlook Q2 2022: The End Game has arrived
- Shocks from covid and the war in Ukraine have forced the global financial and political world to change, but what will the end game be?
Productivity and innovation have never been more importantAs the world economy hits physical limits and central banks tighten their belts, could equities be facing a 10-15% downside?
The great EUR recovery and the difficulty of trading itIf the terrible fog of war hopefully lifts soon, the conditions are promising for the euro to reprice significantly higher.
Tight commodity markets – turbocharged by war and sanctionsWith supply already tight, commodities keep powering on. But will it last for yet another quarter?
Between a rock and a hard placeGeopolitical concerns will add upward price pressures and fears of slower growth, while volatility will remain elevated.
The Great ErosionInflation is everywhere and central banks try to combat it. But will they get it under control in time?
Australian investing: Six considerations amid triple Rs: rising rates, record inflation and likely recessionWhile global financial markets are struggling in an uncertain world, the commodity-heavy Australian ASX index is poised to keep a positive momentum.
Cybersecurity – the rush to catch up with realityWith the invasion of Ukraine, governments and private companies are rushing to reinforce their cyber defenses.