With the current volatility in the world-wide economy, building an investment portfolio that is balanced, certainly plays a crucial role.
You can consider it as the first step towards financial liberty and break-free yourself.
Although, the role of building an investment portfolio has such impact, yet, most people, end up making wrong choices.
It eventually leads them to committing blunders; and by the time they realize, nothing can be done.
Well, you might think this an understatement, but, YES, people actually fail most times trying to build a strong portfolio.
Undoubtedly, no one would ever want to commit these blunders when building an investment portfolio.
Before we dabble more into what are these mistakes, let’s glance into the definition of building an investment portfolio.
So, what actually is this investment portfolio we have been emphasizing so much?
In layman terms, your investment portfolio is the collection of stocks, bonds and other investments you make to receive returns.
Your intention is to amass profits and at the same time, ensure that the principal you invested is well preserved.
Investors choose these pool of investments in respect to risk-rewarding combinations such as high risks for high yields to low risks procuring lower yields.
It can also be from distinct income streams such as steady yet fixed, or sometimes, variable but with growth potential.
Hence, you can easily relate to the importance of building an investment portfolio that is well balanced.
Consider that it is eventually going to bring returns for you on a long run; therefore, no room for error.
The current investment sector has got its own fair share of dubious devils and hence, finding several ill-constructed investment portfolios is not that hard.
Weaker portfolios can result due to a number of factors, which will do more harm to your investments than good.
However, by addressing these concerns, you can ensure your portfolio is strong, and simultaneously, end these portfolio abuses.
Let’s dabble deeper and learn more.
Red Flags to Proprietary Schemes While Building an Investment Portfolio
There should be a strict NO-NO to these kind of schemes when building an investment portfolio.
These biased portfolios comprise of the schemes from a particular bank or financial institution, which only the investor uses.
These proprietary funds are actually managed as well as created by 401K providers.
They often disguise them as subsidiary funds, acting as a cover up for the proprietary funds.
To be precise, if you reach a specific banking institution, where it has a specific set of funds schemes, it seems pretty natural that they will offer you only those set of funds they represent.
These fund schemes in most cases are higher in price than other competitor schemes.
After all, they are taking a cut-off for making you invest in their schemes.
They may not be a cost-effective option for you and can be low performing, but, good for others, on the other hand.
You can only get a realistic and objective decision from an advisor who is not entitled to any specific financial institution.
Always, seek out for independent advisors not linked to any specific bank.
Explore various options and pick the best one for you.
Risk Exposure: Analyze Before Making Investments
One other core factor in the aspect of avoiding blunders when building an investment portfolio is analyzing the risks involved.
In the world of economy, economists refer to this as lumpy risks.
This is a kind of overinvestment and is dangerous to make towards a specific market or asset classes.
It signifies that your portfolio’s value will be in accordance to the bumpy ride, which the market goes through.
In other words, the portfolio value may go up drastically high with the market or might go down drastically.
It all happens in correspondence to the hefty movements of the overinvested asset sector.
This unrealistic, lumpy movements can create problems to any investor due to the volatility and unpredictable nature of the market.
Too much of an investment or too low of an investment can both cause trouble for an investor.
Oftentimes, investors run into this kind of overinvestment thinking they are actually diversifying their investments, which is not the case.
Diversifying is not making a lot of investments to any asset class, nor acquiring a lot of bonds or equities.
Diversifying is procuring a well-judged combination of all three non-correlating class of assets, which are bonds, equities as well as property, alongside other fund avenues.
Remember, it’s never good to be risk averse; instead, be risk diverse.
Your ability to make a fair judgement leaves a direct impact on your returns.
Liquidity Problem When Building an Investment Portfolio
Although, this might seem less obvious to you, but, it is indeed true.
The lack of liquidity is another serious issue when it comes to building an investment portfolio.
Liquidity crisis is not a problem that everyone runs into.
However, when it comes to the question of building an investment portfolio, it has equal importance to other aspects.
Just like liquidity crisis can be dreadful to businesses, it is the same for your personal investment portfolio too.
Generally, liquidity crisis happens to show up when there is a big difference between the timing of your investment goals and the dire need to access immediate cash from your investment.
People fall into this trap mostly because of their misjudgment and wrong wealth management decisions.
Therefore, facing troubles in paying off their bills or other aspects comes into the picture.
Oftentimes, we see that the need of buying a car, or paying off your utility bills rise up all of a sudden.
It eventually forces us to liquidate the equities we’ve been investing for long to gain fruitful returns.
It is strongly recommended that you do a proper wealth management so you never have to face such dire situations.
Investors always invest in equity markets to procure long term, juicy returns.
Hence, it is always imperative that you stick to your plan and not break them.
If you need to access your funds in shorter time like 3-5 years, you mustn’t invest the designated funds in equities markets.
Instead invest in shorter terms.
You’re not encouraged to break an investment just for your dire need of accessing cash, while it’s still in nascent stage and way down the purchase value.
So, keep in mind; always keep aside contingency funds so as to avoid any such undesired circumstances.
If you want to buy a car, or get your own house, allot funds for it aside; never liquidate equities.
Building an investment portfolio takes both time and patience, therefore, you need to be patient to get returns.
Home Investment Bias: Impact on Investment Portfolio
Home Bias or Domestic investment bias, is a very common problem that we oftentimes notice among investors.
Relying on home biased investments, to eliminate risks and receive wondrous returns, is not going to help in building an investment portfolio.
To define home bias investments, we can say it as a tendency of pouring in larger investments towards domestic equities.
In doing this, you are overseeing the seemingly diversifying investment benefits of foreign equities.
It is a regular tendency among investors to invest in domestic schemes, however, it does no good to your investment.
This puts a direct limitation on the diversification of your investments; as a result depriving you off the profits.
A well-constructed and strong investment portfolio will never shy away when it comes to investing in foreign equities.
Although, investing in foreign equities might look riskier firsthand, however, home bias investments possess the same amount of risk to that of a foreign investment.
It is a complete misconception not to invest in foreign equities when building an investment portfolio.
The non-correlation between home bias and foreign investments will help you in balancing the overall risk to your investment portfolio.
Just put in a sensible value of foreign investment to your portfolio and you can see things working out well for you.
You are thereby reducing the risk factor as a whole, which will help in building an investment portfolio.
Broadening or diversifying your investments is always helpful in solidifying your portfolio.
Nevertheless, you should also note that foreign pool of investments comes with their individual risk sets like currency conversions.
So, always do your research carefully and analyze your investment risks when building an investment portfolio.
Monitor Timely When Building an Investment Portfolio
There is nothing more important than fine tuning your portfolio regularly.
At this point, your portfolio manager plays a pivotal role.
Your portfolio manager plays a pivotal role in managing your portfolio and failure to do so can result in catastrophe.
Capital and investment markets can go through substantial changes at a rapid pace.
Proper monitoring is necessary to determine when to hold on to your equities or when to hold onto your bonds.
There can be a time when holding on to your equities and making a good investment to it can bring fruitful results.
It can also be vice-versa at times, when holding on to your bonds can yield greater returns.
Oftentimes, you will see that it is an imperative decision to stack up heavy amount of cash, while at other times, it may not be the same scenario.
Proper monitoring of your portfolio is essential to ensure that the real motive or investment goal stays unchanged.
If any changes occur, you can immediately bring adjustments to your investments.
It prevents you from suffering any adverse effects on portfolio’s performance.
Regular monitoring of your portfolio, at least quarterly to be precise is of utmost importance when building an investment portfolio.
Doing this, you can maintain the balance between your investment risks level and your simultaneous requirements.
As a result, it indicates whether or not to let any of your investments go off.
Always emphasize on the regular management and monitoring of your investment portfolio if you want higher yields.
Your Portfolio Should Not Drift
A very common problem you may face whilst building an investment portfolio is the sudden drift in your portfolio.
This problem related to portfolio drift is actually the automatic changes or shift in your portfolio, in terms of its nature as well as risks associated.
This is a very common problem to the investors in the late 90’s when their portfolio became too equity heavy post market crash.
As a result, their portfolio went off to a higher risk level.
Initially, you may think that you have constructed a well-balanced portfolio and there is nothing wrong with it.
However, if over the time, the prices of your equities become high unlike your bonds, you are playing with risk.
You will have a riskier, all-equity portfolio and that is not going to bring in any good returns for you.
This can actually happen when the values of your equities goes overpriced, during a market crash or goes down substantially.
Therefore, in order to ensure that you do not run into high risk, you must not invest more money into the equity market than you can actually afford to risk into.
In this scenario, again you cannot overlook the role of regular monitoring when building an investment portfolio.
Ignoring Loss Coverage When Building an Investment Portfolio
This is one of the most crucial steps you need to undertake if you want to avoid blunders when building an investment portfolio.
This is a very awkward problem and you would definitely not want to run into it.
Simply buying good stocks, even if you buy blue chips will not assist you in covering up for your losses.
There has to be a well-executed strategy to prevent your portfolio from losses, and it takes time to do it.
Most investors in the late 90’s ran into this trouble ending up with huge losses.
They believed that their fund managers or brokers must have some kind of strategy in place to cover up for losses if something goes wrong.
On contrary to their belief, unfortunately, most of them never had any kind of loss protection strategy.
As a result, the investors ended up incurring heavy, irreparable losses.
There is actually no specific strategy to cover up for the losses, however, seeking for one is undoubtedly worth it.
You can set up lower share limits or stop losses in case of equities.
Therefore, if a share value goes too low or drop down a certain level, you can sell them off immediately.
You can also start monitoring the prices and earnings ratio regularly.
If you find out any overpriced share, you can let it go right away.
Finally, it is not a bad idea to opt for some form of package schemes such as mutual funds.
Mutual funds will actually provide you somewhat guarantee on your capital or investments.
Although mutual funds also do come with their share of associated risks, but they are fairly safe.
All the aforementioned loss protection strategies come with their own set of advantages and disadvantages.
However, it is imperative to spend some time in trying them out to safeguard your sum when building an investment portfolio.
As an investor, you need to know whether your brokers are covering up for your money.
Creative skills in purchasing shares, vague commitments etc. means nothing.
Think before it’s too late.
The bottom-line of the story is that as an investor, you can’t simply pour all your eggs in one basket.
You must take a proper decision with your money and not get buoyed by hustling decisions.
Above strategies are some of the most fundamental tips for building an investment portfolio.
You need to make them as your bible verses, if you want to avoid blunders when building an investment portfolio.
There are several so-called professionals out there, however, they just walk onto the opposite way, ignoring these golden rules.
Analyzing and ensuring you got a strong financial portfolio is not that much of a critical task or rocket science.
All you need is patience, proper judgement and keen attention to these details; then you’re all set.
Always try to ensure, you get exactly what you want from your investment portfolio.
Most advisors would deliberately try to sell you those that brings them hefty paychecks, disregarding the best for you.
It’s on you to decide what the best is for you considering all the aforementioned factors.
Remember, building an investment portfolio requires a lot of hard work and skills.
Even a small mistake could land you up in a severe financial crisis.
Therefore, look before you leap.
Now, you’re all set towards building an investment portfolio after reading this.
So, have a HAPPY INVESTMENT journey.