A badly constructed portfolio could lead to losses. Let us give you a guide to a few blunders you should avoid when creating your own investment portfolio.
Most of us know how to manage a loan, Credit Card or Fixed Deposit but what about an investment portfolio? A badly-constructed portfolio could lead to losses. Let us give you a guide to a few blunders you should avoid when creating your own investment portfolio.
Additional Reading: The Beginner’s Guide to Creating an Investment Portfolio
Variety is the essence of successful investments
If an investor were to create an investment portfolio that consisted only of investment products from the banks and financial institutions used by him, it would largely limit the overall scope of his investments.
In case you choose to go to a certain bank and select a specific set of funds recommended by the bank, these recommended investments may not be the best performing assets or very cost effective.
Rather than going to a specific bank that offers investment options, if you choose to employ the services of an investment advisor, you will be in a position to create a more realistic portfolio that has an objective selection of investments that are not tied to a specific bank or a single product. This simply means adding more variety to your investments.
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Avoid lumpy risks in your portfolio
Avoid taking lumpy risks. What are lumpy risks, you wonder? Well, lumpy risks are a risky over-investment in one or more investment sectors or asset classes. This will cause the overall value of your investment portfolio to increase or decrease rather wildly. This fluctuation will be dependent on the trends observed in the over-invested sector.
Why is this a cause for concern among investors, you ask? It’s simple, really. This is worrisome because too much of one type of investment is dangerous. This defeats the purpose of diversification.
Diversification is achieved by an optimal mix of all the three main asset classes – equities, bonds and real estate – in addition to other types of funds.
Additional Reading: Different Types of Asset Classes
Maintain liquidity and divide your investments wisely
An absence of a certain degree of liquidity in your investments also poses a rather serious problem for investors. This problem is identified when there arises a difference in the timing of the investment goals and the investor’s need to access money from his investment portfolio.
For instance, investments made in equities are usually considered to be for the long term. However, if you have a requirement for funds to purchase a car or a buy a house in the next one to three years, you should consider holding funds for these short-term goals in short-term investment options such as Liquid Funds or Short-term Debt Funds.
Don’t shy away from dabbling in foreign investments
An excessive dependence on domestic investments limits an investor’s potential for portfolio diversification. Foreign investments can add value to an investor’s portfolio.
Due to the non-correlation of foreign investments with domestic investment products, the presence of foreign investments in an investor’s portfolio can reduce the overall level of risk in the portfolio.
You must keep in mind though, that foreign investments carry their own risks, which include currency-translation risks.
Keep an eye on those investments (always)
If your dedicated portfolio manager does not monitor your investments on a regular basis, this can spell disaster for your returns.
The investment market can change rapidly and rather substantially. Monitoring your investment portfolio regularly and rebalancing your asset allocation periodically helps you keep your investments in sync with your reasons for investing.
By reviewing your portfolio at regular intervals, you can make sure that you maintain a suitable level of risk across your investments.
Additional Reading: Benefits of Intelligent Asset Allocation
Make wise investment choices
You must remember that investing is all about making calculated choices based on your individual financial position.
A reliance on buying ‘good stocks and shares’ is not the answer to ensure protection against incurring market losses.
Don’t bank heavily on the possibility of your fund manager having any loss-prevention strategies to bail you out if the markets sink.
Managing risks
Identifying the appropriate investment strategy is not an easy task, but it does not hurt to attempt to find a suitable investment formula that works for you.
When it comes to investing in equities, it could help to set a lower limit on shareholdings, in an attempt to prevent extensive losses that occur as a result of dips in the markets.
Here is a word of caution. There are a few basic rules to follow when creating your investment portfolio. It is rather common for investment advisors to push investors to buy the investment products that make them (the advisors) the most amount of money. This leads to unsuitable investments made by investors and could result in heavy financial losses for them.
Don’t fall prey to everything these investment advisors tell you. Consider your financial situation and life stage before finally making your investment decisions.
Additional Reading: Stay Away From These Worst Investing Mistakes
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