The current era is characterized by a cut-throat competitive streak, where patience seems to have taken a backseat. Individuals today want to build a full-proof portfolio at once and put investment portfolio management on auto-pilot mode and relax for years to come. Everyone is overly eager to invest everything they have right away to achieve the perfect portfolio. They often forget that building a strong portfolio is like a marathon that takes preparation, resilience, discipline and focus.
This fast-changing and dynamic environment is characterized by multiple constantly changing variables and market imperfections. Hence, Investment Portfolio Management cannot be a one-time-only stunt like a sprint, but a long-time and ongoing exercise.
Basic Rules that Govern Investments
There are certain basic rules or theories of investments. It is important that you familiarize yourself with them before proceeding towards investment portfolio management. These are:
Risk-Return Trade-off: Just like in marathons how every runner assumes different risks by deciding when to begin running and sprinting, every financial instrument assumes different risk levels, and hence vary in potential returns. The basic investment premise is that that high risk is associated with high potential returns. Simply put, a riskier approach towards investment portfolio management is likely to produce higher potential returns.
Power of Compounding: The basic premise is that returns from investments grow at exponential rates as returns earned get re-invested, which allows one to earn interest on interest. In this light, in the long run, the power of compounding allows one to secure much higher returns from their investment portfolio management strategy.
Approaches and methods for building a portfolio
1. Adopt a long-term mindset: Winning a marathon requires time and patience and also a carefully laid out strategy. This stands true for investing as well. Short-term investors are like sprinters who run for the quick buck, but investment portfolio management is more similar to marathoners as building wealth requires and patience, and hence should be regarded as a wealth-building journey.
2. Invest regularly with discipline: Building the endurance and stamina to run a marathon requires discipline and regular practice, so does investment portfolio management and building wealth over time. A well-known and effective tool for disciplined investing is the Systematic Investment Plan or SIP. Like the marathoners adopt the habit of walking before running, you as an investor can begin investing in a SIP with small and affordable amounts in regular periodic(daily, weekly or monthly) installments. Over time, you can take a bigger leap and increase your mile by gradually increasing their contributions towards the SIP. The strategy can do wonders towards investment portfolio management as it is much less risky as one stays invested through both, market upswings and downturns without having to worry about the current market scenario.
3. Have an emergency fund in place: Marathon runners have energy reserves through stretches and workouts, so that they don’t collapse or faint during the marathon. Same is applicable when devising an investment portfolio management strategy. Before investing for the long haul, you should invest enough to accumulate emergency reserves in order to cushion against medical expenses or job loss. As a thumb rule, an emergency fund should equate at least three months living expenses. There are various ways in which this can be pursued. For instance, you can consider investing in liquid funds or ultra-short-term funds. Once this has been achieved, only then should you consider pursuing an investment portfolio management strategy for long-term wealth building.
4. Invest in quality stocks: When investing in shares of corporate stocks, you should base your investment portfolio management strategy on company fundamentals and invest in fundamentally strong companies. These can be evaluated through qualitative factors, such as goodwill, reputation, management, business models, innovations and operations and quantitative factors, such as, dividend payments history and profitability. Given the fast-changing and dynamic environment, it is essential that your investment portfolio management strategy includes innovative and forward-minded companies as these are game-changers for the future business environment. You can invest through equity mutual funds or sector funds. Alternatively, you can also invest regularly through installments in equities of self-selected companies through Equity SIP.
Every marathon runner is different and may have varied sets of goals as compared to sprinters whose general aim is to reach the end point. Building a portfolio should be about accumulating stocks and investments which will deliver results even after considerable time has passed. So, before you jump into investment portfolio management, evaluate your strengths, weaknesses and goals. If you wish to stay invested for a long time, charting these parameters can make all the difference!