Tag: diversified stock portfolio

  • Asset Allocation: A Method To Use

    Asset Allocation: A Method To Use

    Asset Allocation: A Method For 2020
    Before you start with asset allocation you have to choose what kind of investor you want to be. How do you see yourselves, like conservative, moderate or even aggressive investors?

    For any investor, filling the investment portfolio with a proper mix of stocks, bonds, cash, real estate, and other investments is critical to financial well-being. This mix is known as “asset allocation.”  The tricky part is that you cannot find a unique one that could suit all. Every investor must find own based on risk tolerance, timeline, and financial goals.

    But even if you already defined what assets you want in your portfolio, it is still easy to get lost. Well, you want to optimize your portfolios, but you are gathering news every minute. And you are changing your decisions based on them. So, the consequence is that is more likely you have some “confused” portfolio, an assemblage of everything instead of a well-diversified portfolio.

    Your portfolio has to be built with the goal of delivering income.

    The asset management landscape is changing

    First of all, In 2020 we can expect a huge rise in assets. It is predictable that economies in, let’s say, Asia, Middle East or Africa will grow faster than in areas with developed economies. 

    Extension in assets will be driven by several trends. One of them is the increase of wealthy individuals in those areas. So, we can expect the asset management landscape in 2020 will be changed. What investors have to do? Investors have to adjust their portfolios to new circumstances. 

    The investors should consider what caused an unusual change of growth and returns last year. Will the same conditions continue into this year? Will global economic growth returning to the trend? What about trade tensions? Is it over? All of this must influence investors’ decisions when building the investment portfolio and asset allocation.

    The effect of asset allocation

    The purpose of diversification is to avoid extremes. Asset allocation has to provide investors to score high returns, reduce volatility, protect them to have significantly lost capital. 

    You can accomplish this by asset allocation. All you have to do is to divide your investments into different classes of assets. Spread it into stocks, bonds, real estate, and cash. They will act separately from each other and your investment will be protected. Of course, you can spread your investment into cryptocurrencies, gold, commodities, or something else. Asset classes can be further divided into several sub-sectors.

    Asset allocation is extremely important. Some studies reveal that asset allocation has a tremendous contribution to a portfolio’s overall returns. Even bigger than individual stock pick. Economists Paul Kaplan and Roger Ibbotson wrote that more than 90% of a portfolio’s long-term returns were generated by asset allocation. So,  asset allocation has an important role in long-term returns.

    How to start?

    The first important step is to determine the target return. The issue is simply – by how much your portfolio has to grow to match your financial goals. But think about another issue too – what is your risk tolerance. How much risk are you able to take to gain a higher return?

    You have to do all of this before choosing the investment strategy. If you are a buy-and-hold type you’ll be able to allow a higher level of risk. You will have periods with lower returns but they will be substituted with periods of higher-than-expected returns. So, it’s easy when you are an investor with a long horizon. But if you are not, if your time horizon is shorter, you’ll favor a lower risk portfolio.

    Conservative Investing

    Conservative investors tend to hold bonds. Their portfolios consist of 60%-80% in bonds of different maturity dates, different issuers. Well, bonds are not without risk, to be honest. Over the past few years, interest rates are rising and it causes bond prices to fall. The bond market can crash as well as the stock market. Do you remember 1979/1980? By some calculations, investors had losses more than $400 billion in total. 

    For example, baby boomers. They are inclining to conservative asset allocation. Their portfolios consist of over 70% in bonds. They control about 65% of all bond assets, by the way.

    Modern asset allocation

    There is something named modern portfolio theory and consequently, modern methods of asset allocation. This means a huge range of asset classes and sub-asset classes into portfolios.

    At its core, modern portfolio theory is all about diversifying your asset allocation. 

    Modern portfolio theory is assumed to help reduce return risk by diversifying into many assets. But the first assumption of this theory is that asset classes are not in correlation. The point is to look at your investment as component parts of a whole. To be more clear, if one asset drops, the other will jump. It is just like a permanent zig-zag. Each investment is a moving gear. According to this theory, investors should balance a potential risk and returns but in the manner on how they might influence the risk and returns of the overall portfolio.

    Start investing

    Yes, you can do that, you can turn plans into dollars. 

    Just create portfolios to maximize the anticipated return based on an acceptable level of risk.

    Don’t time the market. You have to look at your investment in the long term since the time in the market is very important. Do not let violent fluctuations or volatility disturb you. You are investing with your goal in mind.

    Yes, you are more satisfied with less risk and nervous with grown risk. Moreover, you prefer the portfolio with the least risk, but one with the highest return possible and with the lowest risk.

    Modern portfolio theory asserts that the risk for individual stock returns has two components: systematic and unsystematic risk. Systematic risk is the market risk and you cannot avoid it. For example, recessions, interest rates, wars are that kind of risk. The unsystematic risk is specific to individual stocks. Management changes, lessening the company’s operations, and similar, are unsystematic risks. You can lower this type of risk if you have a well-diversified portfolio and good asset allocation. 

    Proper portfolio building is difficult. It isn’t easy. 

    Asset allocation is portfolio diversification

    The goal of asset allocation is to maximize the returns of a portfolio and reduce the risks.

    Stocks will give you strong returns over a long time but they are volatile and inclined to periods ups and downs. But the combination of national and foreign stocks is healthy because sometimes one country is overvalued while another country is undervalued. 

    There are two main approaches to asset allocation.
    Strategic Asset Allocation
    Tactical Asset Allocation

    Strategic asset allocation indicates holding a passive diversified portfolio. Meaning, you will not change your asset allocations based on market conditions. You will hold, add money and re-balance.

    If you choose this strategy, you have to build a diversified portfolio of index funds or ETFs. From time to time you’ll re balance it. For example, when one asset class is increasing and another is decreasing in price. All you have to do in order to maintain the same weighting is to sell the increasing one and buy the underperformed assets.

    Tactical asset allocation is complex and relates to almost permanent adjusting your weightings to different asset classes. You have to recognize where good risk/reward ratios are in the market. 

    The benefit is that you can really reduce volatility and increase returns. Though it’s more tending to individual failure, and if you do it badly you will decrease your returns.

    Bottom line

    Everyone would ask what’s the best asset allocation for a certain age? Here is one simple way to calculate it. 

    Subtract your age from 100 –  that’s the percentage you should keep in stocks. For example, if you’re 40, you should hold 60% of your portfolio in stocks. If you’re 80, you should hold 40% of your portfolio in stocks.

    But some advisors would recommend you to subtract your age from 110 or even 120 since people are living longer and longer. 

    When you choose what kind of investor you want to be whether conservative, moderate or even aggressive, it is time to focus on the asset allocation method. Spread it into allocations over particular investment categories: large, mid, small, and foreign stocks. 

    Balanced asset allocation in your portfolio is the right way to become a successful investor.

  • Diversification Is Important to Your Investment Portfolio

    Diversification Is Important to Your Investment Portfolio

    Diversification Is Important to Your Investment Portfolio
    When stock prices drop, bond prices increase. A portfolio that holds stocks and bonds plays better than the one that holds only stocks.

    Diversification means to spread the risk across different types of investments. The main purpose of diversification is to enhance your chances of investment success. In other words, you are betting on every one.

    Diversification is very important in investing because markets can be volatile and extremely unpredictable. If you diversify your portfolio, you will reduce the chance to lose more than you are prepared to.

    And that is exactly what you would like in investing: to spread your capital among different assets. So you’re not relying on a single asset for all of your returns. The key advantage of diversification is that it provides you to minimize the risk of losing the capital invested.

    What is diversification?

    Diversification means building a portfolio of your investments in a way that the majority of the assets will have a different reaction to the same market performance. For example, when the economy is growing, stocks will outperform bonds. In opposite circumstances, bonds could play better than stocks. Hence, if you hold both stocks and bonds, you will reduce the risks in your portfolio from market swings. 

    Let’s make this more clear. What do you have in your pantry? Only beans? Of course not! When you went to the grocery you bought everything you need for the week or month ahead. The same should be with your investment portfolio. It should consist of various assets. But not too many. Too many assets mean you will not be able to follow their performances. If you are fresh in the stock market, maybe a two-fund portfolio is a good choice for you. More about this you can read HERE. 

    Think of these various types of groceries as the different areas, techniques, and areas available to you as an investor. If you have a variety of assets, you’ll be better protected. In the situation when one of your assets is hit by the risk you will still have the others that can give you a profit.

    Reasons for diversification

    Even the explanation is so simple you can still find so many investors that play on one card. You may ask how some really smart guys could avoid diversification and put all eggs in one basket? We couldn’t find the proper answer because the benefits are so obvious.

    By diversification, investors lower the overall risk. It is logical how this works. When you spread your investments in various classes (diversifying them) you have more chances to avoid the negative influence in your portfolio. For example, let’s say you invested in stocks only and you hold a stock of just one company. Yes, we know you like it, it is a good company, famous, well-run. But if suddenly something unpleasant hit it and the stock price drops, let’s say, for 30%, how that occasion will influence your overall portfolio? You will lose 30% of your portfolio.  But let’s consider the other situation. Let’s say that stock makes up a modest part of 5% in your portfolio. So, how much of your overall portfolio you will lose now? Can you see where is the benefit of diversification? It lowers the risk. Even during economic downturns, you will still have good players in your portfolio. Hence, if you have bonds and stocks added to your portfolio, it is more likely that even one of them will run well during particular circumstances. Bonds will play better when the economy is decreasing, but when the economy is growing, stocks will outperform bonds.

    Diversification and investment strategy

    You can find various investment strategies but two are most popular: growth and value investing.

    Value investors tend to consider the strength of a company and its management. They would estimate if the company’s stock price is undervalued based on its true worth. 

    On the other side, growth investors would estimate how fast the company is growing, could its new products stimulate future earnings, etc.
    By taking just one strategy you can miss out on the benefits of the other. But if you spread your investments on both of these strategies, it is pretty sure that you’ll be able to enjoy the benefits of each.

    Influence of “home country bias”

    Well, it is completely natural that investors are more attracted to their own state markets, the national industry. That’s how we come to the “home country bias”  in investing. Of course, it is a natural tendency. But it can be a problem too. “Home country bias” can limit your investments to the offer from domestic markets. But what is needed for profitable and successful investing is to step out of your comfort zone. Foreign markets can be profitable also. What you have to do as an investor is to add some international fund or company to your portfolio. It is good protection and well-done diversification. Diversification across international markets will protect your investments if the domestic economy downturns (no one wants that, of course) or during the recession in your country. Several years ago we heard one of the investors saying it isn’t a patriotic gesture. Well, we have to say, investing isn’t an act of patriotism. It is all about profit.

    Produces more opportunities

    Eventually, diversification produces more opportunities if you make smart choices that deliver balance to your investment portfolio. 

    For example, you only invest in stocks. But suddenly some great opportunity occurs to invest in, for example, bonds. What will you do? Refuse to invest in bonds because you are not comfortable with them and risk to miss potential profit? We don’t think it is a smart idea. Never miss the opportunity to earn more, that isn’t in the nature of investing. Admit, you will never miss this opportunity to invest in bonds if you have a diversified portfolio. So, diversification gives you more opportunities to invest.

    Protect and improve your finances

    It is important to understand all the benefits of diversification. It isn’t hard to do. Actually, it is very simple. You have to read more, learn and be patient. If you diversify your investment portfolio you will have a chance to build stable finances over time.

    How to diversify your portfolio

    Firstly, never be too much invested. You will not be the winner if you own hundreds of assets. Okay, let’s say this way. Your portfolio is your team. And, as in every team, each part plays its role. No coach will put all players in one position. It’s stupid. Plus, how such a team will win anything? Of course, zero chances! 

    The point of diversifying is to hold investments that able to work separated tasks on your team. 

    Every single part of your portfolio should have a different role. For example, if you prefer stocks, diversify your portfolio to S&P 500 (that would provide you exposure to large-caps) and add some small-caps.

    If you have a bond portfolio diversify it across short and long bonds, or higher-quality bonds, etc. That will reduce the risks. Or just add alternative investments in your portfolio. For example, private equity, hedge funds, real property, venture capital, commodities, etc.

    Bottom line

    How will you know you’re diversified? A well-diversified investment portfolio will never move in the same trend and at the same time. You must have one thing on your mind: you are the manager of your portfolio. Also, it is almost impossible for all investments to grow all the time. It is 100% sure that some of your positions will be lost, will lose you money. When that happens you will need the other holdings to balance that fall.

    Diversification guards you against producing an undesired risk to your capital. Anyway, it is too risky to put all your money into one single investment. The key to diversification is to spread your money across asset classes and to allocate within classes. That is a smart approach.

  • Taking A Position While Investing

    Taking A Position While Investing

    3 min read

    Taking A Position While Investing
    What is the definition of taking a position? How to accurately control your portfolio positions?

    By Gorica Gligorijevic

    Taking a position in the stock market indicates that a trader is ready to make choices, to go long or short. These are two positions that an investor can take. Going long means to buy, short to sale.
    When you hold a long position that means you own the stock. Why is this important? I like to say investing is a marathon.
    Investing takes time to grow. It requires a relatively moderate risk and moderate returns in the short run. But investing may produce bigger returns by placing both, interests and dividends to hold for a longer period of time. So, we are taking a long position when investing.
    You would like to hold your stock for several years and have a decent return. In most circumstances, you should take the profit when a stock grows 20% to 25% of the buy price.
    A “short” position relates to the sale of a stock you really don’t own. You have to borrow shares from a stockbroker. You will have the open position of shares and that has to be closed after some time. Investors who sell short believe the price of the stock will go down. And they are selling, meaning they go short.  After you go short, the price of the same stock may go down more and you can buy it back and make a profit. Never wait to the price of that stock to increase and then buy, you will catch the loss.

    If the stock’s price fell to $0, you owe the stockbroker zero and your profit would 100%. What if the stock price grows doubles when you close the position? Calculate! You may gain loss to 200%, double more of your buying price.

    But keep one thing in your minds, short selling isn’t for beginners.

    Taking a position in the investment

    You are facing the horror: that stock you bought go lower, from hour to hour, day after day.

    If it fails 5%, you may say the market is changeable, so why to be worried. But the dropping is continuing. Your stock is 10% down, after a few days 25%. To defeat a 50% loss you will actually need a 100% gain.

    How do you feel now? What are you going to do? To wait until it drops 50%?

    So, what to do?

    When to get out in the investment?

    There are several possible scenarios on taking a position but at first, try not to get panicked.

    You should get out in your investment when your stock no longer meets your goal. Or you purchased it by mistake, it can happen.

    The other reason for selling a stock can be you need money, or you would like to get out your investment because of asset allocation or reallocation.

    The general rule of investing is never getting out of your investment just because the stock price is dropping. The rule “buy high and sell low” isn’t relevant while investing. Otherwise, you will never earn money in the stock market.

    A selling an investment too quickly can hurt your portfolio.

    Can you “ensure” some positions?

    All beginners, no matter how smart they are, have illusions, so they have losses. You have to keep your losses small, don’t let them scare you and survive.

    The rules for managing the risk that we’ll show you may feel disturbing for beginners because they have small accounts. Well, the proper risk control may limits trade size. I know that. But it is important for you to know that it is a protection in the first place.

    The crucial rule of risk control is the 2% rule: never risk more than 2% of your account investment on any opened trade.

    Start by writing down three numbers for every trade: your entry, target and stop. Without them, a trade may become a gamble.

    I want to share with you one of the best advice I got when I become an investor.

    If you see your stock rises by 40% you should sell 20% of your position. When the stock later increases 49% more, sell the other 20%. That will provide you to have 125% of your primary position.

    You have 100% of the initial position. And it grows 40%:

    100%*1.4=140%

    You sell 20% of it, which means that now in your hands you have 80% left:

    140%*0.8=112%

    Stocks rise for another 40% progressively:

    112%*1.4=156.8%

    Now you sell 20% of the stock you have in your hands:

    156.8%*0.8=125.44%

    You end up with a 125.44% value of the initial position.

    To make this simpler, when you buy some stock you have 100% in your hands. After some time they rise by 40%, so you have 140% of the value. And you sell 20% of that 140% and you have 80% of that 140% in your hands which is 112%.
    After some time that 112% rise for another 40% – that means you have 156,8% in your hands. And you make another selling of 20% from that 156,8% which means you will have, after second selling, 125,44% of your initial position.
    Also, you may apply a 20% stop loss on all positions. This serves to block whipsawed. If you are properly handling your portfolio positions you could reduce lower-performing positions before the 20% level is scored.
    Taking a position in trading and investing is always in the question, so you must know how to handle your portfolio. On some assets, you are taking a long position but on others, you are taking a short position. It is necessary because you would like to protect your investments as a whole.

  • A Diversified Stock Portfolio – How to create?

    A Diversified Stock Portfolio – How to create?

    How to create a diversified stock portfolio 1Building a diversified stock portfolio is just the beginning but an important part of investing. Here is how to do that.

    By Guy Avtalyon

    We already mentioned a diversified stock portfolio.

    ‘Don’t put all your eggs in the same basket’ is probably the most popular saying telling investors about the importance of portfolio diversification. Otherwise, how to spread and reduce risk? 

    The major advantage of the diversified stock portfolio is its ability to protect your entire portfolio from the volatility associated with different asset classes.

    In this article, we look at ways to protect your portfolio by spreading your risk across several different asset classes. Also, some of the many different assets in which you can invest, each with different risk characteristics.

    Where is the advantage of the diversified stock portfolio?

    The risks attributable to assets cannot be avoided. But when they are managed as part of a diversified portfolio, they can be reduced. Individual assets have a bearing on the overall level of risk you are exposed to.

    And the association between the assets has even greater importance. This article considers how a well-constructed investment portfolio should be diversified in a variety of ways. Including overall investment style, a number of individual asset classes, the spread of geographical allocation, and the approach of the fund manager.
    The key is to build a  diversified stock portfolio with a mix of different investments that make sense for your attitude to risk.

    A balanced investment portfolio should hold a mix of equities: stocks, bonds, property, and cash.

    Yes, we know. For some of you, the world of investing is complicated. There are mutual funds, exchange-traded funds, target-date funds, a variety of bonds and fixed-income products and then, of course, individual stocks.

    These days more and more investors are turning to low-cost ETFs. And necessary, there is the question: is it worth taking the time to build an individual stock portfolio? Yes, it is.

    But you have to put in some time and research.

    There are various advantages to individual stock ownership.

    We believe an individual investor has an advantage over professional investors. But only if you are willing to do the homework necessary to understand the company, management, and the industry underlying each individual stock.

    How can you start picking the companies that go into their stock portfolio? Building a solid stock portfolio requires some time, research, and homework.

    What is a well-diversified stock portfolio

    The diversified stock portfolio should have 10 to 30 individual stocks.

    There are 10 stock sectors classified by S&P Dow Jones Indices. These include energy, materials, industrials, consumer discretionary, consumer staples. Also, health care, financials, information technology, telecommunication services, and utilities.

    A general rule is to own two to three of the top companies in each main sector.

    Stock rankings, screeners, and lists can help individual investors in their quest to find the best stocks for their needs. The rankings can slice and dice stock market members up by returns, market capitalization, dividend yield, price-to-earnings ratio, and other criteria.

    Investing in research doesn’t have to be for professional portfolio managers. It is for individual investors too.

    How to diversify a portfolio between growth and value stocks?

    Or between dividend stocks and those focused on plowing their profits back into their operations.

    Diversification is a beautiful thing because it can lower risk without lowering the expected return of a portfolio. This is more or less related to magic by Wall Street standards. Use your research and logic to weed out the stocks that you do not like. Or the companies that have historically lost money due to the competitive pressures.

    It will be good for you to understand the behavioral psychology and economics at play behind the companies you hold in your portfolio.

    For example, knowing the demand elasticity, or how much a change in price will impact the quantity demanded, can be useful in understanding a company or industry’s prospects.

    If the price of gas went up 15% tomorrow, it’s very unlikely there would be a corresponding drop in demand. People need to drive, of course.

    How to establish an investment time frame in your diversified stock portfolio?

    Since you are going to own individual stocks you need at least three to five years. The longer the better. In order to reduce certain volatility.

     

    Hence, to be successful in individual stock investing, you must do your homework. But more importantly, you need to have a steady temperament and be confident in your own convictions and analyses.

    Building your diversified stock portfolio may be just the beginning. But, for the interested and dedicated investor, the payoffs could be well worth the work.

    Picking good stocks requires research, time, and the ability to evaluate many parameters for the stock, industry, and overall economy.

    And while buying a few dividend stocks should earn you some healthy interest income. Your real dividends will be the long-term gains you rack up as you watch your picks grow.

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