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Plan your portfolio like a pro

POSTED ON MAY 13, 2020    

Once you’ve gained investing knowledge and experience, making your own portfolio might be your next step.

If you allowed a fund manager to run things before, especially if you started with a unit investment trust fund (UITF) or mutual fund, you’ll be calling the shots now. You’ll have to decide everything: how much money to invest, what kind of assets to get, and how the money will be divided among these assets.

Here are the basic considerations of the professionals who make custom portfolios for their clients.

Goal

Try to be as specific as possible with your goal. The more detailed you are, the more likely your portfolio is to help you reach it.

Let’s say your goal is “I want to buy a house.” Improve it by saying “I want to buy a house in City X worth around P5 million.”  With a concrete figure to aim for, you can now figure out how much money you should invest and how much it needs to grow to meet your goal.

The more specific, the better. You can still improve on the last example by saying “I want to grow my P250,000 so I can afford the down payment and amortizations on a house in City X worth around P5 million. “

While being very specific is great, you don’t need every detail right away. After all, you can always fine-tune your goal and your portfolio as you go along.

Risk profile and capacity

Remember risk profiles? You’ll need to consider yours because each type of asset behaves a certain way and has its own type of risk, which comes from uncertainty.

On one hand, money market instruments are very predictable. On the other, while they can have patterns, stock prices are generally tough to read. Bonds are somewhere in between.

At the same time, you should also check how much risk you can stand. For example, if you don’t have an emergency fund yet, being very aggressive and taking on a lot of risk isn’t the best thing to do. At the same time, if you’re financially stable and don’t have dependents yet, your risk profile might need updating.

If your risk profile and your capacity for risk are don’t match up, the smart choice is the more conservative one. As the saying goes, “Better safe than sorry.”

Expenses and cash needs

Can you leave your money in the investments until you reach your goal, or will you need to withdraw occasionally? Is your goal to have your investment earnings sustain you? These questions are all about liquidity, and how much of it you need affects how you diversify your portfolio.

For example, if you want your investment to regularly pay out money, then look at bonds and time deposits with short terms. But, if you have a regular source of income and you’re fine with leaving the investment alone, you can look at stocks that have more growth potential but need time to balance out all the paper loss and paper profit. 

Time horizon

This is straightforward: When do you want to achieve your goal? How far (or near) in the future it is will determine if your goal is realistic or not.

Let’s say you’re investing P500,000 for your child’s entire college education, which would cost around P800,000. If your child is already a high school sophomore, reaching the goal with investments alone will be very tough. However, if your child is an infant, the chances are much better.

The more money you need at an earlier time, the more likely your options will require a higher appetite for risk. 

Personal factors

When you’ve picked the asset types for your portfolio, it’s time to start looking at the specific options. While you do, make sure you’re aware of limitations. For example, some investments might not be accessible to you because of your citizenship or occupation.

Lastly, if you’re investing in corporate bonds or stocks, you might want to see if the company’s values match yours. For example, based on financial reports a company is poised to succeed but its stocks are still cheap. However, you disagree with its labor practices. Would you still want to invest in it?

These are things you may want to consider. You may not want your conscience to be bothered while you’re investing, after all. 

Final thoughts

Professional fund managers spend a long time studying and practicing their craft to produce portfolios tailored to their clients’ needs. That means they have plenty of mathematical and analytical tools to make the best investment decisions. However, no matter how advanced they get, everything still points back to the things mentioned.

Don’t be afraid to research about more advanced methods. But don’t feel pressured either. When you’re in doubt, always go back to these basics. They’re at the heart of every well-made portfolio.

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