Develop Your Portfolio Strategy
Well, by now you should have a good idea of what aspects of your investor personality you should pay attention to in order to achieve your end investment goals.
The right questions to start investing
Asking yourself the right questions is crucial to set yourself up for success. The questions and scenarios we laid out in the previous section should help you understand what some of those right questions are. You should think about each trait individually and ask yourself those questions. Write the answers down.
Eventually, if you follow that process correctly, you will have a clear, comprehensive picture of your financial situation, what your objectives and expectations are in life and in your finances, and what constraints you have.
The end result should look something like this:
|Age||23 Years Old||56 Years Old|
|Time horizon (Investment Timeframe)||Long-term (+30 Years)||Mid/short-term (5-10 Years)|
|Investing expertise||Not much experience/knowledge||Some experience (dealth with her 401-k and other)|
|Interest in learning more||Absolutely||Not really|
|Employment||Entry-level sales job||Business owner|
|Yearly salary||$36,000 ($3,000/month)||$90,000 ($7,500/month)|
|Have any debt?||Yes. $5,000 car loan||Yes. $150,000 from mortgage, car loans, etc.|
|How much should you invest?||$2,000||$1,000|
|Capital additions to investments||Monthly inflow of $600||Monthly inflow of $250|
|Risk tolerance||Very low, must play it safe||High, will take risks to make extra returns|
|Short-term goals||Pay monthly car loans off||Pay down debt|
|Mid-term goals||Move out of parents house in 2 year||Pay for $2,000 vacation in Spain in 4 years|
|Long-term goals||Buy a $300,000 house in 15 years||Have $100,000 for retirement in 10 years|
From the above list, we can easily see most of the relevant information these people would need to set up a good, personal investing strategy that is aimed at accomplishing some set of objectives.
Ultimately, the outcome of this exercise is to determine what your objectives are, but also to identify what your constraints are.
We have identified what some of your objectives may be. But there are some (more specific) objectives and expectations that you may have, such as achieving a certain average annual rate of return.
You should also identify, note, and take into account a set of investment constraints, which are your investment limitations, and depend on your personality or circumstances. Some of the most common ones are time horizon, liquidity needs, risk tolerance, etc.
We will dig into objectives and constraints in future segments.
Steps to Develop the Strategy
Below is a visual map that represents the top-down approach we recommend taking to create your portfolio. This means that we will start by looking at the bigger picture allocation (taking a macroeconomic view and an overall allocation) and then we will progressively get down to the details (security selection).
Click on the image to maximize
Now that you have identified your investment objectives and constraints, we will discover the steps to create your ideal investment strategy.
Capital Market Expectations
The markets are in constant movement and change. Different assets or asset classes behave and are affected differently by the specific events, and by macroeconomic, social and even biological factors (as we have seen with the COVID-19 crisis). Therefore, it is crucial for us to get a feel for what is going on in the world and to make certain assumptions about the future performance of the asset classes we may want to invest in.
At BullGlobe, we have developed a system that allows us to constantly be listening, capturing, and analyzing relevant capital market data from some of the top sources in the industry to generate a set of future outcome expectations in which we base our core asset allocations.
We analyze the crucial macroeconomic factors that affect all asset classes to make some educated forecast of the following key parameters that will define our portfolio’s performance:
- Volatility: how much will the assets fluctuate in the future?
- Return: what level of growth should we expect from these assets?
- Correlations: in what direction will these assets be moving compared to each other.
Find out more about Capital Market Expectations in future sections.
Once your objectives and constraints are determined, and we have a set level of expectations, we are ready to set our strategic core asset allocation.
Let’s see how to do that in the next sections.