Now that we’ve decided to take the plunge into creating our very own investment portfolio, there still remain some unanswered questions: What should my first step be? What assets should I include? What external factors can affect my portfolio’s performance and how can I reduce this exposure?

We will seek to answer these questions as you take the proverbial ‘first step’ on your investment journey.

 

What should my first step be?

DIY projects can be fun when you’re painting your room, or trying to sew that fancy outfit. But not so much when handling your financial goals and dreams. Once you have made the conscious decision to create your investment portfolio, you should consult an experienced professional. Investment firms are usually the best place to look, as they have teams of persons who specialize in various areas of the investment process and are able to guide you along your investment journey. Leaving your financial goals to chance is not the most judicious approach to financial independence. While your portfolio is being professionally managed, it is still important to ensure you understand the recommendations, decisions and transactions carried out by your investment manager. It helps. Trust me.

 

What assets should I include?

Simply put, financial assets are tangible liquid assets used as a store of value, or to generate some level of income. These may include stocks, bonds and money market instruments to name a few; each with its own unique characteristics, risks and income potential. The old adage “don’t put all your eggs in one basket” is an important technique of investing (known officially as diversification) and one which may be essential to your portfolio’s success. It can be very tempting to want to invest only in high-yielding assets such as stocks, or bonds but it is more important to create a balanced portfolio of assets. With a balanced mix of assets your portfolio will be better able to withstand changes in market conditions such as changes in interest rates, inflation or even a change in government. Ideally your portfolio should include each of the major financial assets, however how much of each will be determined by your risk profile and financial objectives. For example a conservative person-one who prefers stability should not invest heavily in volatile assets such as stocks. Also, someone saving for a long-term goal such as retirement should have little or no cash within the portfolio because of the marginal returns it generates.

 

What external factors can affect my portfolio’s performance and how can I reduce this exposure?
We have no control over when it rains; what we do control however is if we get wet. We plan for eventualities in many areas of our lives-we have motor insurance if we have an accident, we have water tanks if our piped water supply is interrupted and candles if we have a power outage. So why not do the same for our investment portfolio? We operate in a global marketplace where events half the world away can affect your portfolio’s performance. These external factors can range from political elections held locally to changes in GDP growth in China. No one has a crystal ball (if you do, can I borrow it sometime?) so how do we prepare for an unknown event? Remember that important technique mentioned earlier? Diversification or a having a balanced portfolio will go a long way in reducing the effects of market events. While we cannot totally avoid risks associated with market events, we can reduce it through spreading that risk over various assets. An experienced investment advisor can help you to understand trends in the market and to also identify and interpret signs which may indicate possible market changes, and structure your portfolio accordingly.

 

Creating a successful portfolio is no walk in the park. It will take precision planning, shrewd execution and constant monitoring to get ‘it’ right. I’ve never climbed a mountain, ran a marathon, or won any championships-but that feeling when you get ‘it’ right would aptly compare with any of the aforesaid accomplishments. Take that first step, stay disciplined, keep focused and your financial success won’t end up being the next urban legend. Don’t worry, it’s not rocket science. Or is it? See you next time.

Blessedinvestor is a co-author/ contributor on financiallyawake.com. He is a certified Personal Portfolio Advisor with approximately 8 years experience in advising clients on optimizing their investment portfolio.