Tuesday, February 12, 2019

Building Investment Portfolio - For Budding Investors

Being a young and budding investor, we often hear the term called investment portfolio but we are unsure what is in the portfolio. To put it across in layman term, it is a mix of things you invest your money in. Usually it’s a mix of things because you want to diversify your money to grow your wealth, just like the saying do not put all your eggs into one basket. For example, you have invested in a condo in Setia Alam and you have also invested a blue chip stocks in the Malaysia stock market. But then again, there are multiple reasons and factors that could affect your decision in building your investment portfolio.

In the perfect world, our investment portfolio supposedly make tonnes of money from our investments and we never lose our money. The markets would go up and stay bullish forever and we will sell our blue chip stocks to buy a villa by the beach. Sadly, the world doesn’t work this way in reality. The world works in balance where it consist of winners and losers. That’s capitalism. Do you know the way of investment also differs in age too? Typically the young ones are more of a risk taker while investors in their 40s are more likely to be risk averse. So, you will be questioning yourself like how to invest? Or how do I decide if this investment is profit-making?

You don’t just blindly throw and cast your nets into the vast sea without setting a goal or the numbers of fish you want to catch. Common questions to ask yourself could be like what are the goals you want to achieve? How much you want to earn? When should you gain profit or stop loss? There are also typical goals for young people like saving for your new nest, future child’s education and retirement funding. Then, depending on your goals, the way you invest will be very different too. Here are some common ways you can design your investment portfolio.

1. Stocks-bonds ratio
This is the classic way of designing an investment portfolio, stocks-bonds ratio. Overall, you can decide how many percent of your investments should be in stocks and how many percent should your bonds be in. Here’s how you calculate the ratio.

120 – [your age] = Percentage of investments in stocks
Let’s say you’re 35 years old. 120 – 35 = 85. So according to this calculation, you should have: 85% invested in stocks, and 15% in bonds.

To further illustrate this:
l  Age 25: Stocks 95%, Bonds 5%
l  Age 35: Stocks 85%, Bonds 15%
l  Age 45: Stocks 75%, Bonds 25%
l  Age 55: Stocks 65%, Bonds 35%
l  Age 65: Stocks 55%, Bonds 45%

Thanks to Harry Markowitz who won the 1990 Nobel Prize in economics, it is actually an oversimplify principle derived from Modern Portfolio Theory. However, over the recent years, more and more people are criticizing the said theory as it is not applicable to the modern wall anymore compared in the 1970s and 1980s.

2. Advisor strategy
In this strategy, you will outsource your investment decisions to personal finance advisor. When time is limited on daily basis, we suggest for you to look for highly-paid professionals in the corporate world. It could be pretty daunting if you will need to do research and work full time, the best move is to hire a smart and capable person to manage your finances.

But, when budget is an issue, you can consider looking into apps/websites that uses artificial intelligence (AI) to help you in making investment decisions. With using the predictive technology in the finance investment industry, the AI is literally working for you day and night tirelessly. This is a real investment.

At the end of the day, investing is a personal thing and no one has a perfect portfolio but it is more of a suitable method of building portfolio. There are some days where an investor makes compulsive decision or on some days they can be extremely reserved with their investments. Every investor have different traits and styles in making decision, some prefer to be detailed and some prefer to look into big picture. However, what we advise to budding investors is that start small and be humble, a right amount of confident will help along the journey in building your wealth. Remember, overconfident kills. Till then, may the force be with you.

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