Today, there are many risks besides innovations in the financial sector. Individual investors should have a well-protected portfolio that can offset these risks. There are basic things you need to know in order to have a portfolio that is adjusted to your investment goals and the amount of risk you can take. The asset allocation plan you have created should secure you for the future and make you feel safe. For all these, investors can create portfolios that are suitable for their investment strategies by progressing systematically. In our article, we will talk about what you need to do to create such a system.
Determining Your Eligible Asset Allocation
The first step to take when starting to build your portfolio is to determine your financial situation and goals. While setting your goals, you should estimate how much time you have to develop your investments, the amount you will invest and your future needs map. Because the goals of a person who graduated from a new university and those who have retired and plan to spend their savings for the expenses of their children are very different from each other and they need different investment strategies.
Another important factor is your risk tolerance and personal characteristics. For example, can you afford to lose a significant amount of money while making an investment with a higher probability of return? People want their profits to increase exponentially every year, but if you are experiencing uneasiness and stress even in short-term falls during the year, risky investment strategies are not for you.
Therefore, by determining your current situation, future capital needs and risk tolerance, you plan the first phase of your investment strategy. Risky investments bring along the risk of losing as well as the possibility of winning. The investment strategies of someone who started to invest at the beginning of their career and whose only source of income is not the investments they have made, and those who are close to retirement and plan to earn enough money to satisfy themselves within a certain period of time while preserving their savings are not the same.
Conservative and Aggressive Investors
Depending on the amount of risk you take, the types of assets in your portfolio distribution will change. If you are an investor who can take more risk, the larger the number of stocks in your portfolio, the lower the proportion of fixed income securities, making you an aggressive investor. For conservative investors, the situation is the opposite. They want to get a fixed return by taking minimum risk.
The primary goal of conservative investors is to protect their portfolio value rather than multiply. The allocation shown above will generate current income from bonds and also provide some long-term capital growth potential from investment in high-quality stocks.
Realizing the Portfolio
After the asset allocation stage, you should divide the amount you plan to invest according to the asset types suitable for you. While it may seem simple on a basic level, different asset classes have different potential risks. You can also spread these risks across various industries. For example, an investor may divide some of his capital into different industrial sectors and domestic and foreign stocks. For bonds, it can be shared in the form of long and short term ones, or as government or corporations.
There are different ways to choose the assets to distribute your capital to for your investment plan strategy;
Stocks - You can choose stocks according to the level of risk you want to take. The most important things that you should pay attention to when making this choice are the sector, market value and stock type of the company in which you will buy the share. You can get help from companies that use stock scanners to see your choices in an easy to understand list. In this way, you can identify future opportunities and risks and make detailed analysis before purchasing. It can be one of the most labor-intensive investment types in your stock portfolio. Because you should follow the price changes of assets instantly and be aware of company and sector news.
Bonds - There are some factors to consider when choosing a bond. These; coupon, maturity, type of bond and credit rating and general interest rate
Mutual Funds - Mutual funds have stocks and bonds that are researched and recommended by experts for you. Because this research requires effort and knowledge, professionals get paid for their work. Therefore, your income may decrease slightly. But because index funds reflect an established index and are passively managed, they have lower fees.
Exchange Traded Funds (ETFs) - ETFs cover a variety of asset classes. Since they are not managed actively, they are more cost effective than mutual funds and allow you to create diversity in your portfolio.
Reassessing Portfolio Weights
It is not enough to just create a portfolio for your investments to progress according to your plan. You need to constantly analyze your portfolio and update it according to changes. Price changes may also require changes in asset weights in your portfolio. In order to evaluate the distribution of assets in your portfolio, you can analyze your investments by categorizing them numerically and determine the ratio of instantaneous values of each category to the total portfolio.
Apart from the price changes of your assets, other factors that may change over time may also be your future needs, risk tolerance and instant financial situation. Depending on the changing factors, you may need to rearrange the asset weights in your portfolio. For example, if you want to make lower-risk investments and protect your savings, you can invest in funds by reducing the amount of stocks in your portfolio.
To rearrange the weights, determine which of your existing assets is too much and which is not.
After determining the surplus in your portfolio, determine which securities you should purchase with the return of the assets you sell. While determining these securities, you can benefit from the approaches we explained above.
For example, you made a good profit rate with your investment in stocks last year. However, you may be subject to capital gains taxes when you sell stocks to offset the weights in your portfolio. In such a situation, while investing in different types of assets, it may be better not to make new investments in that asset class in the future. In this way, you can reduce your portfolio weight without being subject to capital gains taxes.
You should also regularly consider any excessive growths in your current portfolio. If you expect a sudden drop at the end of an excessive rise in a stock, you may want to dispose of that stock despite the tax. Analysts' comments and research reports can be useful tools to help you measure the overall view of your assets. You can also use the Stock API or Financial Data APIs for this.