Investing was previously reserved for high-wealth individuals and businesses with large cash holdings, as a way to preserve and grow wealth in an expanding capitalist economy. But today, access to investment opportunities has been somewhat democratised.
The emergence of retail trading platforms has empowered individuals to take charge of their savings, and enjoy the same growth as business leaders before them. But for those new to the practice, building a portfolio can be a nerve-wracking endeavour. Where should you start in building a good one?
Risk Management
Many burgeoning investors make one vital mistake when beginning to build their portfolio: they prioritise returns over risk. Seasoned investors may be able to read the market well enough to enjoy high returns, but they do so in the knowledge of the risk inherent to their investments. Greener investors will not have the same insights and run a much higher risk of failing to grow their investments – or even losing them entirely.
As such, risk and its management should be central to your portfolio-building strategy. There are those that build seven-figure careers from simply consulting with high-wealth clients regarding risk management, but there are some simple approaches you can take to manage the risk in your own portfolio.
Diversity
The key word in the building of a healthy portfolio is ‘diversity’. This is a golden principle and one which will unilaterally improve your portfolio and its returns. Diversity can be applied in a number of ways, as we will discover in the next section, but the primary understanding you should have of the term relates to your investments themselves.
From a risk perspective alone, placing all of your money in one company is a dangerous move. If that company fails, your investment is depleted. If your investments were spread across a number of companies, the failure of one would only impact a portion of your portfolio. Diversity reduces risk.
This can be employed to your benefit, as well. High-risk investments can be offset by larger low-risk holdings, ensuring a robust increase in returns without unduly threatening your principal investment. For those without the money to buy investments and assets outright, spread betting enables access to a diverse range of assets and stocks, allowing you to speculate diversely within one method of investment.
Diversity in Strategy
But the investments themselves are not the only way in which you can diversify. You can also use multiple forms of investment to diversify your movements and spread your investments across markets. Currencies and assets exist separately in share-trading markets, with different economies and strategies. You may find one more lucrative than the other, especially when it comes to unique market stressors such as recession.
Lastly, you may find that your strategy for choosing investments loses its value over time – whether the markets change, or new behaviours emerge. Being a reflexive investor can alter your strategy over time to remain profitable.