cft

Balance your portfolio across different asset classes

Do you have all your money invested in a single stock because you strongly believe in the stock? Or everything in bank checking / saving accounts because you are afraid of losing the same if you put in the stock market? If this is your strategy, think again!


user

A

3 years ago | 2 min read

Do you have all your money invested in a single stock because you strongly believe in the stock? Or everything in bank checking / saving accounts because you are afraid of losing the same if you put in the stock market? If this is your strategy, think again!

When many of us start to think about investing, we either go too aggressive (“all money in one or few stocks” strategy) or too passive (“just let my money grow in saving account” strategy).

While these can offer you tremendous growth (the aggressive strategy) or enough financial safety (the passive strategy), none of them are good for your financial health

Imagine you had $ 1000 to invest. How would you build your portfolio? Let’s understand this with a simple mathematical concept — Weighted Averages.

In the example above, $ 1000 invested across 5 asset classes has a combined expected annual return rate of 15%.

Note that in the expected annual growth column, you can predict some with more or less high accuracy (eg saving account rate offered by your bank — can differ from bank to bank but will not fluctuate a lot).

As you move down the asset classes in the table, the confidence on expected return goes down (you might end up with much higher or much lower returns than what you expect). Hence the risk factor increases.

When you think about putting your $ 1000 to work and make more money for you, you have to think what is the right portfolio balance for you.

If you put all that money in saving account, you will grow at a meager 2% per annum (per example above) and your $ 1000 will become about $ 1800 after 30 years.

If you split as per the example portfolio above, your $ 1000 will become about $ 66,000 after 30 years (if you indeed get 15% returns year over year). Other combinations will lead to different outcomes.

These are just examples, but the important thing to consider for yourself is your risk appetite. The more share of your portfolio you allocate to risky asset classes, the higher chances of your money growing too fast as well as declining too fast.

More money you have in safe assets, more secure your money is but you also hardly get any return.

Whatever portfolio strategy you decide, it is important to diversify across different types of assets and take calculated risks.

There is no single portfolio strategy which works the same for all — it depends on your personal life situation and risk appetite.

While index funds “may” not offer as high return as other individual stocks / investment classes, they offer you a stable stream of income in the long run (eg S&P 500 — the US index — has given over 9% annual returns over the last 30 years at the time of writing this blog).

At the same time, if you invest a small part of your portfolio (whatever% suits you best) in small cap and high growth stocks — that chunk of your money has potential of tremendous growth and can make you rich.

Invest safely, invest wisely, plan your portfolio and don’t just buy anything.

Upvote


user
Created by

A

I am a business person with strong consulting, sales and operations background, and high affection for technology. I also provide advice / consulting to small / startup companies on request.


people
Post

Upvote

Downvote

Comment

Bookmark

Share


Related Articles