Discover more from From 0 to 1 in the Stock Market
Portfolio Building Part one
A portfolio is, simply said, a basket of assets. It is a very complex task to build one but I’ll give you the essence here.
As in previous articles, there’s always something to learn before approaching the main subject and this case is no different. I don’t do this to bother but rather to get you to acknowledge that there’s no linear way of acting in Stock Investing and there’s always things to think about before deciding.
It should come as no surprise by now that the stock market is volatile and this volatility will affect you emotionally and that’s not wrong at all, we are humans after all. It’s not what happens to us but how we react to it.
Since we know we are immersing ourselves into an emotional roller coaster, it is appropriate to determine beforehand what kind of roller coaster is better suited for us. Every person has a certain limit both physically and mentally of how much volatility or emotional risk should he be exposed to. If the limit is exceeded, the situation may take control over the investor and the ending would not be happy.
This is why we first need to determine what our Risk Profile is to later proceed to at least select a strategy. This Risk Profile will determine whether an investor is more personally able of handling higher volatility or ‘risk’ or if he should aim for a more conservative approach. Risk Profile contemplates things such as:
Emotional risk aversion: How comfortable you are in taking financial risk.
Time Horizon: The time you are willing to remain invested (consider age/objective)
Resources and needs: Upcoming liquidity needs, insurance level, emergency fund.
Income: The size and stability of your income are a huge determinant of your risk capacity.
Building a portfolio:
Stocks are what is called an Asset Class but, among this Asset Class, there are multiple Sub Asset Classes, each of them with their own associated risk. Your risk profile will theoretically determine what type of equity you could be exposed to and in what proportion.
According to your risk profile, the point of the curve in which your portfolio should theoretically be allocated for you to not be in a fragile position. Here are some variations:
Conservative (100% Defensive). If you find yourself in a financially fragile position or are not emotionally capable of managing risk or have a short horizon (less than 2 years), a portfolio like this could suit you.
Balanced (50% Defensive / 50% Growth). This type of portfolio could suit an investor with a medium horizon (5 years), financially stable, with no immediate liquidity needs and capable of handling volatility to try to achieve higher returns.
Aggressive (100% Growth). If you have a 10yr+ horizon, are financially stable, have a high insurance level, an emergency fund and are emotionally capable of handling volatility, this portfolio may suit you.
Thanks for reading From 0 to 1 in the Stock Market! Subscribe for free to receive new posts.
This is a structure on which to start to build a portfolio, not a manual.
Considering your risk profile before investing is crucial.
If interested in reading the topics in more detail, feel free to contact me by Twitter.