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Layers and Depths of building Portfolio: Investing Primer


Investment portfolios are buckets that combine different asset classes in order to optimize the risk to reward ratio. Stocks, bonds, ETFs, gold, equity, and debt are typical securities that come to mind when one thinks about investments. Portfolios provide financial stability and independence in the long run, against market volatility.


You could very well invest in individual stocks or be completely vested in the real state. But the risks of having all your funds in one asset category outweigh the returns. Here, portfolios help you make risky (and possibly high-reward) investments while offsetting the risks with low-risk assets like bonds and index funds.


Things to Consider


Building your investment portfolio is a multi-dimensional process that requires understanding your present needs, future financial goals, and risk tolerance. Adaptability and active management are skills pivotal in putting together a successful portfolio.


Asset allocation involves layers and depths that require scrupulous deliberation and balancing of assets to achieve profitable returns that are under our risk appetite.


Let's look at the pivotal points that need to be examined before constructing a dependable portfolio:

1. Monetary Goals - short, medium, and long term


Our financial timelines can be categorized into three broad phases - short, medium, and long-term.


Short-term

There are aspirations that we want to fulfill in the immediate future, such as buying a car, that are right ahead on the timeline.


Long-term

There would be future provident plans that we have concocted for post-retirement. These goals will sit at the near end of our timeline.


Medium-term

And still, some situations will require substantial capital that can be placed on the timeline between the present and future. Goals like marriage, the birth of a child, or buying a house will make up this medium-term phase.


As investors, the portfolios should reflect our personal financial goals; a varied basket of financial instruments - stocks, ETFs, stacks, etc. - will ensure returns corresponding to our goals at the opportune times.


2. Risk Appetite and Loss Tolerance


Risk appetite and loss tolerance are important factors in deciding the rebalancing strategy in asset allocation. With these measures, we can adjust the asset’s weights in a portfolio to always be within our risk limits. You need to recognize the amount of loss you can endure and still stay financially secure and competent.


True diversification across geographical economies and uncorrelated asset classes can lower the net risk in your portfolio. Every investor needs to have a risk profile mapped out over present debts, assets, and future objectives, to guide investments worth picking or selling.


Risk profiles can chiefly be divided into three buckets - conservative, aggressive, and balanced. A person with many liabilities could prefer a conservative approach to investing, while another with considerable capital might take the aggressive or balanced front.


3. Present Circumstances - Protection and Emergency Assets


A holistic portfolio is incomplete without accounting for sudden emergencies and contingencies. Easily liquified assets can insulate us from unexpected crises. To expect the unexpected is the goal of including these in our investment plan.


Insurance and emergency funds are great examples of investment safeguards that can provide quick cash when in need. Your portfolio should reserve a portion for emergency funds easily exchangeable with cash.


4. Choosing the Right Investment Options


So far, we have talked about the characteristic of portfolios and the general mix of assets inside. But how do you choose which assets are worth investing in? There are plenty of already established matrices that gauge the health of an asset.


Tools like price-to-earnings ratio and debt-to-equity ratio are commonly leveraged qualifications. There are other well-known estimators as well, like PEG ratio, price-to-book ratio, etc., that have proven to be reliable aid in making decisions.


But these metrics fail to capture a 360 view of the investment. Any large business, by nature, is stratified and diversified into other business sectors. By only allowing popular quantification methods to guide our investment acumen, we are setting our investment to blind spots.




For example, the P/E ratio for Google is about 20, which is an inadequate evaluation factor considering Google’s diversified revenue sources and dominance in the tech industry through its several leading products.


Let's go over the different factors that determine the health of an investment:



A. Cash flow


Cash flow is the difference between cash going in and out of business. A positive cash flow is a sign of valuable shares. Maximizing cash flows is a good indication of a successful business.


Analyzing the cash flow of a company could uncover hidden insights and nuances.


B. Present condition and Future Plans


The future of an industry is instrumental to an asset’s performance in the long haul. Industries go through ups and downs in profitability depending on the economic and geopolitical climate.


The pandemic witnessed a boom in the health and pharma industries as the world needed more vaccines. The tech industry proliferated when work, recreation and education were moved online.


The war between Russia and Ukraine resulted in economic waves that reverberated across the world, with oil and metal prices skyrocketing. It is worth keeping abreast of developments in industries you wish to invest in.



C. Multiple Revenue Resources and Business Segments


A no-brainer here. The growth rate and market cap of the company are important metrics to be looking out for before making any buys. Also, a company might have more than one revenue source. In such cases, a thorough study of its subsidiaries and mergers is warranted.


D. Brand Appraisal


Brand value is key to any organization’s brand loyalty and customer leverage. It is a competitive advantage that develops over years of loyal partnerships and strong customer relationships.


Big players in the market usually promise stable growth over a long time to keep their brand value intact. So naturally, appraising the brand trust and market penetration of companies is the crucial identifier for selecting the right assets.



5. Revaluate and Adjust Portfolio



The distribution of assets in a portfolio does not stay static over time. It evolves with the market trends and risk appetite of the investor. It is imperative to identify investments that need to be let go while adding new assets to the portfolio.


Benchmarks are unmanaged securities against which we can evaluate the performance of our portfolio in a particular market sector. Investors must compare the portfolio’s returns with standard benchmarks and make adjustments periodically.


In conclusion, active management and rebalancing of portfolios are necessary. We, at ShiftAltCap, offer pre-built and expert-managed portfolios - called stacks - that can be used to invest across geographics worldwide.


Our weather-proof “All-in-Tech stack” has demonstrated returns of over 118.27 percent and a three-year CAGR of 32.45 percent. Join us now to know more about our offerings.



 


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