Portfolio Diversification - anbcapital
Smart, disciplined, and regular investment from an early age is the best way to grow and mature your wealth. The key to intelligent investing is diversification. A diversified portfolio minimizes risks over a long-term investment horizon while helping you achieve your financial goals.
When you start early, you learn the value of disciplined savings as you continue to plan for your life goals. You will see your portfolio react to your decisions, enhancing your investment experience and encouraging you to continue to remain disciplined. You may begin with a mix of cash, stocks, Sukuk, bonds, government securities and mutual funds. Once you have developed confidence in your decision-making abilities and accumulated sufficient capital, you may further diversify into areas such as global markets and real estate. We share here with you a few guidelines on how to go about diversifying your investment holdings.
Diversification of investments will help your investment portfolio absorb the shocks of any financial disruptions and market volatility, providing the best balance for your saving plan. However, diversification is not limited to just the types of investments or classes of securities.
Invest in different industries, interest plans, and tenures. Do not put all your investments in one sector, no matter how well it has performed or is expected to perform. Diversify in other sectors that are picking up, such as education technology or information technology.
Broadly speaking, there are two basic types of investments – stocks and Sukuk/bonds. While stocks are seen as high-risk with high returns, Sukuk/bonds are usually considered more stable but with lower returns. To minimize your risk exposure, you should divide your money between these two options. Your risk appetite, investment horizon and liquidity requirements will determine how your investment portfolio is constituted.
Asset distribution is typically based on age and lifestyle. At a younger age, you can take more risk in your portfolio, choosing stocks that promise higher returns.
On the other hand, if you are approaching retirement, or have upcoming spending requirements (such as college education for your child), you should be cautious with your investments and possibly focus more on Sukuk/bonds.
You can minimize unexpected volatility of your investments by applying qualitative risk analysis before buying or selling a stock. A qualitative risk analysis assigns a pre-defined rating to score a project’s probability of success. Consider developing a matrix with specific qualitative parameters that evaluate a stock’s potential to perform well over the long-term.
These parameters may include a robust business model, the role of founding shareholders, corporate governance, brand value, compliance with regulations, effective risk management practices, the dependability of its product or services, and competitive advantages.
Money markets instruments include certificates of deposit (CDs), commercial papers (CPs), and treasury bills (T-bills). The biggest advantage of these securities is the easy liquidity and safety of investments.
You may use money market investments as a part of your portfolio to offset against other ‘riskier’ investments, such as high-growth volatile stocks.
Constant trading is a sure way to reduce your earnings. A long-term buy-hold strategy and a more passive investment approach will allow your investments to grow. That said, do not be afraid to curtail holdings that have appreciated too quickly or take up more of your investment portfolio than is required or prudent.
Before investing in financial markets, you need to understand the factors that influence its movements. Financial markets include stock exchanges, foreign exchanges, Sukuk/bond markets, money markets, and the interbank markets. These are essentially a marketplace for financial instruments and, like any other market, they respond to demand and supply dynamics.
Like any other market, there are also external factors such as interest rates and inflation that influence financial markets. Markets also react strongly to policy changes announced or indicated by central banks and financial arms of governments.
Global markets are characterized by an extremely fast-moving dynamic where an investor must also consider multiple regulatory jurisdictions. As a young investor, it can take time to learn how markets function, understand trends and fluctuations, and what drives these shifts.
You can start with an exchange-traded fund (ETF) with a low-cost structure and ample liquidity. This will allow you to invest safely with a small amount of capital, giving you the perfect opportunity to observe and understand how global markets work.
Balance is important in life and in investments. It is important to periodically check how your investment portfolio is distributed between different asset classes and securities. This review should be based on your goals and planned life milestones along with your assessment of your past investing performance.
A financial adviser can help you review your investments vis-à-vis your investment goals, your risk appetite and your spending requirements. This exercise will help make you more disciplined about your investments, while keeping you aware of the quality of and the risk inherent in your portfolio.
A monthly subscription program is a good option under which you set aside a small amount of money for regular investment, rather than waiting to accumulate a large amount. Under this method, you can invest a fixed amount in mutual funds at fixed intervals. The investment amount would get deducted directly from your bank account, getting you used to the idea of setting aside a fixed amount regularly for your future.