Investing is more than buying and selling stocks. Without a strategy, you can easily get lost or start making emotional decisions. This emphasizes the need for strong portfolio management. Even if you are working with a small budget, you can leverage the concepts of portfolio management to make better decisions. In the end, your portfolio follows a set of principles that are independent of the funds below. Naturally, you do need different strategies to accommodate different sizes of investments.
Principles of portfolio management
When you start with investing, a key question to ask is: what am I investing for? This has a significant impact on your goals as well as your investment horizon. If you want to invest to save up for a boat, you will use a different strategy than saving for your pension. The risk appetite also differs in those cases. Therefore, you need to ask yourself the following question when you start investing:
- What is my goal?
- What is my horizon?
- What is my risk appetite (e.g., ten-point scale from low to high)
- What is my portfolio size?
Diversification
With these questions answered, you can start to formulate your very own portfolio. The size of your portfolio combined with your risk appetite can help you determine your amount of diversification. When you have more funds, you can diversify more. If your portfolio is smaller, you can still diversify significantly but probably need to use exchange-traded funds (ETFs) such as the MSCi World to ensure diversification.
Risk appetite
The goal and horizon impact your decision on the risk appetite. If you want to make high profits over short periods, you shall adjust your risk appetite accordingly (i.e., take up more risk). If you want to have a stable portfolio over longer periods, it is better to stick with diversification and established companies (e.g., blue chip).
Build and test
These decisions form the foundation of your portfolio and its growth. Using these guidelines, you can start to build your portfolio and start to test your strategy. Based on your goals, you can adjust your strategy. For example, if it turns out that your returns are lower than expected, you can shift your strategy to become more aggressive or target different industries and markets (e.g., such as emerging economies).
What kind of technology to use?
There are different types of technology you can leverage to track your portfolio. A good example that is being used by many traders is the spreadsheet. Tools such as Microsoft Excel, have long been the common way to track portfolios. However, this tool does come with flaws, as you are limited to retrieving data from the internet through macros and formulas.
Stocks tracker technology
A good substitute is the stocks tracker. This is an application dedicated to tracking stocks that goes beyond the features of a spreadsheet. For example, you can create buckets of stocks and compare them to each other. Additionally, there are analyses available combined with news concerning stocks, industries, and world markets. This gives you a good feel of the overall market while also being able to track your portfolio. You can even build several portfolios to simulate other choices and combinations to further optimize your portfolio.
