Building an Investment Portfolio

7.1 Balancing Risk, Profitability, and Diversity

Within your portfolio you want to balance risk, profitability, and diversity. Investors trading in traditional accounts can build diversity by choosing mutual funds, indexed funds, and exchange traded funds (ETFs). Each of these equities lets you buy a basket of assets with one purchase. By choosing from different geographies, sectors, and kinds of assets, you can build a diverse portfolio.

The kinds of assets you choose within those funds or indices will be based on your risk tolerance and the profitability you seek. A small cap fund carries more risk and perhaps more potential profits than the more conservative index of large, established companies. But this is not always true. When you have studied the cycles and the trends, you may find some assets that appear secure may actually carry more risk. And you may find some equities considered risky that have lower risk because you know the trends.

Once you’ve chosen an asset based on fundamental principles, trust your decision. Of course, you’ll use stop losses to protect from a dramatic downside. But then, let your asset run up to your profit goal. Don’t second guess each time there’s a dip in the market. Most investors lose money because they let fear take the upper hand. They sell in a dip and then lack the confidence to buy as the asset moves up. Wise investors choose assets based on sound principles and then stay the course unless the fundamentals change.

If you decide to go with individual equities rather than a fund or index, go with quality rather than quantity. Choose about 10 excellent assets to begin with. Making them best in class is a good balance between risk and profitability. Well researched, single assets may outperform an index that is diluted with lesser picks, but, because all your eggs are in one asset, it typically elevates your risk.

Knowledgeable day trading or swing trading may also be a way to build a portfolio with a portion of your assets. Copying successful traders gives you the potential for higher returns and tight trading stops can give you prudent risk management.

When you use CFDs and copy trading you have an accessible way to diversify your portfolio over an immense range of asset classes. You may profit from both rising and falling markets. With iToroStocks platform, you can also assess the risk of each trader. Still, CFDs are considered high risk trading.

7.2 Regular Additions to Your Wealth-Building Fund

Most investors don’t have enough money to start with one lump sum and grow it into a huge nest-egg. They need to continually add to the money they have available to invest. This means making weekly or monthly contributions to their investment portfolio.

Take stock of your current budget and find ways to free up money for long term wealth building. As with all ways to free up money, it comes down to either spending less or earning more… or both.

The sooner you start your regular investing, the larger your portfolio is likely to become and the faster you may achieve your goals. Your consistent periodic investment produces large benefits. It gives investors that chance to benefit from years of compounding interest.

Look at the graph. It assumes you start with $100 and add $100 a month, in 50 years your total investment will be $60,100. But with a moderate rate of return, even including periodic drawdowns, a stock market calculator suggests a possible end value of $8,208,000 return.

Notice how the majority of the gains come at the end of the time period. If you invested $100/month for only 30 years, your total estimated value would be about $409,704, or under a half a million dollars. Of course your actual outlay would also be lower, only $36,100. Yet you’d still see your money multiplied by more than 10 times! And remember, the past is no prediction of future gains and all investing carries the risk of loss.

7.3 Using Model Portfolios and Copy Trading

Many investment advisors offer model portfolios. They may have dozens based on your timeline, your risk factors, and your goals. This is a simple way to get started. If you’re not sure how to jump in, go ahead and start with a standard portfolio. It’s better to begin and then refine your asset allocation as you move along. Morningstar has a number of these generic portfolios for you to look at.34

The limitation of standard models is that they may not exactly address your level of risk, your age and timeline, or your goals. Also, many financial investors do not have your best interests at heart. They may suggest mutual funds or other assets that pay them larger commissions at the expense of your returns.

If you can trade CFDs on a social trading platform, you open your portfolio possibilities. It’s easy to match your goals, age, and risk factor to tailor a portfolio exactly to your needs.

Let me show you how it works on the site. As soon as you create a profile on the site, you can deposit funds. Or you can experiment for a while as a virtual trader and see nearly all the investment tools you need to make good choices. You have the chance to personalise a watchlist so at a quick glance you can assess how equities you are following are performing. You can see the percentage of people buying or selling the assets you follow so you can gauge whether you want to do the same.

But most importantly, you can click on the copy people site and find instant access to model portfolios. First, check the risk score to find one you think you might be compatible with. Then look at other pieces of information. You may want someone from your own country or you may choose to follow a Popular Investor who has a large following or one that has produced returns you seek.

Do remember all trading carries risk. Also know that past performance does not guarantee future returns. There may have been an anomaly that produced either extra-ordinary or disappointing results. Your next step is to click on the synopsis of someone you think you may want to copy. There you will be able to see the securities they are investing in. Make sure the assets they are invested in fit with your strategy.

You can even delve a little further to gain insight into their thinking. You’re free to ask them questions on the feed. When you click on any one asset, you’ll see when they bought it and what their target profit goal is. You can also check out past performance and risks. Finally, with one click you can copy their entire portfolio and follow their trading decisions.

When you know your goals, timeline and risk level it’s easy to check each Popular Investor portfolio against your measurments to see how they mesh. You can also go one step further. Look at each asset in the trader’s site to see how well it adds to the diversity you want. And researching the companies in Popular Investors’ portfolios can help you see how they are distributed into the different sectors and classes.

Know that you can exit an individual trade of any trader you copy at any time. It’s a one click process. So if you keep on top of the traders you follow, it’s easy to keep your diversification in mind, and in check, by exiting trades that don’t fit your strategy.