The optimal Investment Portfolio to Ensure the Best returns
The optimal investment portfolio is not an absolute concept, but rather a relative one. Therefore, it is difficult to define a general and unified model that defines its specifications from the point of view of all investors. An investment portfolio is a set of investments in certain financial assets (according to the investor’s strategy), which will provide maximum profitability in the case of minimal risks.
The primary goal of the investment portfolio is to reduce risks and maximize returns through what is known as “diversification”, but that does not mean that you need to fill your portfolio with an endless set of financial assets (stocks, bonds, commodities, mutual funds and ETFs..) Excessive diversification does more harm than good. In the following lines, we will show you whether you are applying diversification in a proper way, or are you making things worse.
4 rules for building and managing an optimal investment portfolio
The common reason that stands in the way of building an investment portfolio and managing it according to a specific strategy is that many investors are unable to resist investing in every new investment that seems promising. To help you figure out whether your investment portfolio is a model of healthy diversification or irresponsible diversification, you should answer the following four questions:
1. Do you own investments that you don’t really understand?
I don’t mean that you generally understand it, like, “Yeah, it’s a leveraged ETF that gives you twice the return of the S&P 500” or “I have a diversified annual investment that gives me a guaranteed 7% annual return.” I’m talking about knowing how this leveraged return is calculated financially (because this has major implications for the return it will provide), and what exactly that guaranteed 7% applies to. If you don’t understand how investing actually works, you won’t know whether you really need it or not.
2. Can you explain exactly why you bought each investment you own?
Mentioning investing in an investment show on TV or appearing on a magazine’s Top 10 Investments list is not an acceptable answer. Not only should you know how investing works, but you should also understand the specific role it plays in your portfolio, and exactly how it improves portfolio performance. You should be able to quantify the benefits you will get from this investment, by citing research or performance numbers showing how it will enhance the balance between risk and return.
3. Do you have investments that you never touched after you bought them?
If you are pursuing a long-term investment strategy, the asset mix of 50% large company stocks, 10% small companies, and 40% bonds will reflect your investment objectives and risk appetite. Different investments yield different returns, so you should rebalance your portfolio periodically. To achieve this, the following tips must be taken into account:
Review your original investment strategy, by reviewing the original goals that you set for yourself in terms of the distribution of companies in your investment portfolio according to the business sector, geographical distribution, and the percentage of risks that you want in your portfolio.
Sell shares in a sector or type of company that has now exceeded its target and reinvest the money in other areas that have not met its target.
Reinvest the returns from a sector or type of company in which you have achieved your goals of profit in other investments that have not achieved their goal.
Invest new money in a sector or type of company that has not yet achieved its goal.
Keep in mind that there is a cost to all investment methods, you may have to pay a brokerage fee to buy or sell shares.
Carefully consider the costs versus benefit of balancing your portfolio
Selling stocks that have appreciated in value may lead to higher taxes on your profits. In this case, it may be best to invest new money – if any – in your investment portfolio.
4. Do you add new investments to your portfolio regularly?
If the answer is yes, you’re probably making things worse. Your investment buildup is almost done after you’ve designed a well-balanced investment portfolio. Of course, you have to monitor and rebalance the portfolio, perhaps getting rid of a failed investment and replacing it with a new, better version of the same investment (a situation you could largely avoid if you settled on index funds), but you don’t need to constantly add new asset classes or investments just because investment firms keep bring them up. If you do this, you will end up with an unwieldy portfolio of investments that is difficult to manage, rather than a simple portfolio that balances risk and return efficiently.
These were 4 simple rules that will help you build a successful investment portfolio, and avoid the confusion that prevents you from achieving your investment goals.
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