Every investor, no matter how big or small, should know how to create a profitable portfolio. Managing risks and rewards takes practice, but there are many techniques that you can use to make sure you are managing your money wisely.
Since not every investment will be a winner all the time, Suraj Kumar Rajwani believes that it is necessary to balance your portfolio to cushion yourself against periodic changes in the market. Some investments do well in booming markets while others remain steady. It is important to know how each one of your investments is expected to perform.
Suraj Rajwani, an experienced venture capitalist with DoubleRock, shares four tips for starting a profitable portfolio.
1. Understand Your Purpose and Goals
The first thing that you should keep in mind when creating a profitable portfolio is your overall goal. You may have a short-term or long-term goal or both. In the long term, your goals may include sending children to college or buying a house. In the short term, you may wish to invest in paying for a vacation or other large purchase to be enjoyed soon.
You need to have a clear goal foremost in your mind to help you understand where you stand financially. It will also help you decide how much you need to invest to achieve the profits you want.
Goals should have clear dollar amounts and a specific time frame. For example, if you want to buy a house, you should specify that you can save $500,000 in ten years. Do not set open-ended goals like becoming rich without setting a timeframe and dollar amount.
2. Being Realistic about Risks
Another aspect of investment that you need to consider is the certainty of risks. You need to sit down and talk with your spouse or partner, if you have one, and make sure you are on the same page regarding risk-taking. You should balance what you want to achieve and the risks you need to take to reach that point.
3. Allocate Assets Properly
The two primary factors for building a profitable portfolio are your age and your current financial situation. You should invest very differently if you are at the beginning of your career versus how you would invest near retirement.
If you are starting late, you need to take fewer risks. If you are a college graduate starting your first job, you can take more risks.
You need to analyze your financial situation and do it honestly. Decide how much you can afford to save each month without crippling your ability to buy the necessities of life. If you get into the trap of using credit cards for your daily expenses because all of your free cash goes into investments, you will hamstring yourself.
4. Balancing Your Portfolio
When you know what level of risk you should take, how much money you need to save and invest, and what your goals are, you can move on to buying stocks and other investments. You should have a more aggressive portfolio featuring high-risk, high-reward stock choices if you can take higher risks. If you are close to retirement, you need to step back and invest in more fixed-income securities like CDs, bonds, and large-cap stocks.
Aggressive young investors can buy more small- and mid-cap stocks. These stocks are inherently riskier than their large-cap counterparts. Investors at younger ages can contribute between 15 and 20 percent of their money in small-caps and 20 to 30 percent in mid-caps. 50 to 60 percent should be kept in large-cap stocks.
While you are planning your portfolio, it is a must to keep enough money in cash. Keep up to 10 percent in cash at all times. This applies to both aggressive and conservative investors.
Conservative inventors should put 70 to 80 percent of their money into large-cap and blue-chip stocks, as well as fixed-income instruments. Keep in mind that these percentages are not hard and fast but are simply a general guide. Work on fine-tuning your portfolio and ensuring that it provides the maximum profits for an acceptable level of risk.
Diversification is a concept that most investors are familiar with, but new investors may need to be walked through the process. Suraj Rajwani shares the diversification process and how you can allocate your investments for minimum exposure to market volatility.
It is key to invest your capital in diverse assets or classes. This means that if one asset performs poorly, the others can take up the slack and keep your money safe. Investors should consider gold bank deposits, real estate, and bonds, among other options, and avoid keeping all of their money in stocks.
Creating a Profitable Portfolio
When you follow these four tips from Suraj Rajwani, you will have an easier time creating a portfolio that will bring you adequate returns. Make sure that you set the amount you will invest and the level of risk according to your age and financial situation. Finally, be sure that you are diversified in your portfolio to minimize the plunges that could happen in certain sectors.