A well-structured and diversified investment portfolio is based on choosing the right investment assets, with different levels of risk, and seeking to reduce fixed costs.
On this blog I often speak of investment diversification, insisting on the importance of creating a heterogeneous investment portfolio in order to mitigate the overall risk. But let’s take a step back: how do you actually build an investment portfolio?
To build the investment portfolio first define the basics
When starting to define your investment portfolio, you need to focus on a series of information:
- The level of risk that you are able to bear (low, medium or high)
- the duration of the investment (short, medium or long term)
- the investment objective (for example, generate a more or less constant flow of income or aim at capital enhancement)
As it is easy to understand, there is no single “one fits all” portfolio, valid for all investors and for all occasions. Everyone has different needs and objectives and it is therefore important to build a tailor-made asset allocation.
Invest correctly: choose asset classes and instruments
Once the boundaries to move have been defined, the next step is to evaluate the investable universe, or the asset classes in which you can choose to invest: Europe (Italy, Uk, France…) Equity, USA Equity, Short / Medium / Long-term Euro Bond, Euro Corporate Bond, USA Corporate Bond, High Yield Bond, Commodities … and so on.
Not only that: the investor should also have a clearer picture of what are the tools that allow you to invest in these asset classes: Shares, ETFs, ETCs, Funds, Bonds. In fact, in order to make an informed choice, it is important to know the financial characteristics of each instrument – not only in terms of expected return, but also and above all in terms of costs, liquidity and risk. Below a summary of these characteristics.
Diversification of investments
Let’s go back to our “mantra”: always diversify! For your investment portfolio, the principle of diversification must never be lost sight of. Not knowing what the future performance of the investments will be, it is good to “spread” your capital on instruments with different characteristics, in order to minimize the probability that all investments will go wrong at the same time.
The greater the diversification of the portfolio, the lower the risk of loss of capital.
Diversification does not depend so much on the number of instruments that make up the portfolio, but rather on their characteristics and overall asset allocation.
Investments must be monitored
Once the quota to be attributed to each individual instrument has been established, based on the objectives and the time horizon of each (perhaps with the help of a financial advisor), it is important to monitor your investment, possibly trying not to intervene at the first shock on the markets, focusing instead on medium / long-term objectives.
Be careful about doing it yourself
Creating well-balanced portfolios on your own is not that simple: it requires a certain knowledge of the markets and good familiarity with financial instruments. Alternatively, it is always possible to ask for the support of an expert professional: this does not mean passively abandoning oneself to others’ choices, but being advised step by step in the construction of a portfolio that is truly tailored to individual needs.