How To Build a Portfolio and Types of Investment Portfolio Strategies

In the previous chapter, you learned how portfolio management works. Now, you will learn how to build your investment portfolio. 

Successfully building and managing an investment portfolio is essential for growing your wealth over the long term. A properly diversified portfolio that aligns with your individual risk tolerance and time horizon can help you achieve key financial goals - whether saving for retirement, a down payment on a house or your child’s college education. This comprehensive guide will provide detailed guidance on core aspects of thoughtfully constructing and proactively monitoring and managing an investment portfolio positioned for prosperity.

Monitoring Your Portfolio

Actively monitoring your investment portfolio continuously is critical to ensure that it remains optimally aligned with your intended goals and risk levels over time. As macroeconomic conditions and market dynamics shift, the performance of individual asset classes can drift significantly, leading to unintended variations in asset allocations and revisiting your portfolio no less than twice annually and periodically after major market inflexion points or events allows you to rebalance asset class exposures back to intended levels when warranted. 

Here are several key items savvy investors make a practice of regularly checking on across all components of their broader investment portfolio:

Asset Allocation  

• Compare current allocation percentages across major asset classes like stocks, bonds and cash equivalents against original portfolio targets.
• Evaluate if ongoing relative performance has skewed allocations to be higher or lower than intended.
• Identify any allocation drift where market results have altered the investment time horizon or risk profile.  

Performance   

• Establish appropriate benchmarks for the portfolio and each major asset class.
• Measure overall actual portfolio returns against blended benchmark over multiple trailing periods.
• Determine reasons for any significant over or underperformance vs benchmark.

Investment Holdings  

• Verify all current funds or individual stock holdings remain optimally aligned with your goals, risk tolerance, and time horizon.
• Evaluate if any holdings have drifted from their original style or risk profile mandating a change.
• Ensure the mix of holdings adequately balances return enhancement with risk control.
• You can check your investment holdings on Angel One from the ‘PORTFOLIO’ section.

Fees   

• Compare expense ratios across investment accounts and holdings to a competitive universe.
• As lower cost options emerge, evaluate the merits of potentially switching funds to save costs over time. 

Economic and Market Landscape

• Stay apprised of evolving macroeconomic, geopolitical and market conditions.  
• Monitor the impact of changes to interest rates, regulations, inflation or employment on markets.
• Follow market valuations, volatility, and investor sentiment for signs of excess.

Investment Portfolio News  

• Review the latest announcements from specific companies held in the portfolio. 
• Verify no negative fundamental developments across current equity positions.  
• Research sell-side analyst reports and rating changes on current holdings.   

By regularly reviewing and staying on top of these pivotal areas, you can take proactive and timely portfolio management steps if needed. This includes revisiting strategic asset allocation, rebalancing class exposures, potentially adjusting equity sector allocations, or replacing investment options that are no longer suitable. Keeping an attentive eye and finger on the pulse of your investment portfolio is necessary for continued alignment and optimal performance.

Rebalancing Your Portfolio  

Rebalancing involves the process of deliberately buying and selling assets within your portfolio in order to re-establish intended target allocation levels across investment classes. Suppose a particular asset type has risen dramatically in value due to a period of outsized returns. In that case, portfolio rebalancing necessitates paring back the overweighted assets that have done extremely well to original targets, even if still demonstrating positive momentum.  

The resulting sale proceeds can then be redirected into purchasing additional units of the previously underperforming investment categories in order to raise their current allocations back up closer to the desired portfolio percentages. This forces investors to adhere to the psychologically difficult but often wise approach of buying low and selling high, which remains an essential component of long-term investment success.

Deliberately reducing exposure to asset groups that have strongly outperformed enables locking in gains and captures profits from high flyers that may be due for a breather or pullback. Simultaneously, redeploying those monies into recovering the lagging, undervalued sections of a portfolio poised to play catch up also sets investors up to realize future outperformance when the script eventually flips.

When evaluating the merits of rebalancing an investment portfolio, critical facets to assess include 

Current Versus Target Allocations   

• Compare current percentages across each major asset class to original portfolio targets.
• Quantify the allocation differential between current and target mixes in basis points.

Pre-Determine Rebalancing Thresholds  

• Stipulate the acceptable range investors are comfortable with before requiring rebalancing. 
• For example, define 5% above or below as the allocation deviation point to trigger action.   

Remaining Time Horizon 

• Factor the length of the remaining time to achieve portfolio investment goals. 
• Longer-term horizons allow for wider allocation bands before rebalancing. 

Analyse Associated Trading Costs

• Evaluate any fees or taxes related to selling existing positions with embedded gains.
• Assess if rebalancing merits justify incremental transaction expenses.

Evaluate Ongoing Trends 

• Consider the strength and duration of relative asset group performance trends.  
• Contemplate if positive patterns are expected to persist in the near term or revert.  

Although annual or semi-annual rebalancing sessions are common portfolio hygiene practices, adhering to predetermined upper and lower asset allocation guardrails enables fluid, opportunistic adjustments. Alternatively, investors may rebalance around fresh capital infusions when adding new money. The vital element is consistently maintaining this portfolio monitoring discipline to align with ever-evolving financial markets and economic conditions.  

Constructing an Investment Portfolio

Meticulously following a methodical, structured approach in building an investment portfolio vastly improves the likelihood of creating optimal, durable asset allocation properly calibrated to an investor’s personal risk tolerance and goals-based time horizon. Outlined below are prudent step-by-step guidelines for thoughtfully constructing an investment portfolio designed for sustained success across market cycles:

Clarify Investment Objectives and Time Frames

• Outline specific portfolio goals – retirement savings, college funds, discretionary spending pool, etc.  
• Classify objectives by investment duration - short-term (<3 years), medium (3-7 years), long-term (7+ years).

Conduct Thorough Risk Tolerance Evaluation 

• Assess both willingness and ability to accept potential asset value volatility.
• Link the risk comfort and return objectives to the portfolio's asset classes.

Recognize Relevant Asset Group

• Define the proper composition of a portfolio in terms of equities, fixed income, liquidity, alternatives, and precious metals.
• Adds diversification benefits with risk posture alignment.

Strategically Allocate Across Asset Classes

• Consider each goal's investment horizon, return requirements, and risk tolerance.
• Consider the group’s historical returns and volatility to guide asset allocation.

Conduct Due Diligence on Investments

• Study index mutual funds, ETFs, individual stocks and bonds.
• Stress testing of selections in order to check their suitability in various market environments.

Implement Final Portfolio

• Fund investment accounts determined strategic asset allocation levels. 
• Codify framework for ongoing monitoring and risk-based rebalancing.

Conduct Periodic Reviews 

• Revalidate strategic asset mix still congruent as the financial life stage evolves.  
• Opportunistically, rebalance back to target allocations per the rebalancing plan.

Investors benefit tremendously by applying this deliberate, phased procedure in establishing investment portfolio asset allocation and holdings selection. Adhering to predetermined allocation guidelines and proactively managing the portfolio over subsequent years aids in navigating turbulent markets on the optimal path to achieving financial aspirations and investment success.  

Types of Investment Portfolio Strategies

In addition to foundational strategic asset allocation principles, investors can further enhance investment portfolio design and performance by incorporating tactically managed portfolio approaches tailored to their unique situation. Outlined below are common investor portfolio strategies:

Passive Investing

Passive portfolio strategies aim to mirror the returns of a specific market index such as the S&P 500 rather than outperform. These rules-based approaches demand minimal buying and selling of securities once the initial portfolio is constructed allowing significantly lower expenses and tax efficiency versus actively managed offerings. Passively managed portfolios assume market indexes already reflect available information, making it impossible to outperform consistently. Popular passive approaches include:

• Index Mutual Funds & ETFs - Offer diversified market exposure, rock-bottom fees and tax efficiency.
• Target Date Retirement Funds - Automatically adjust underlying asset allocation glide path over time based on the target retirement date.

Active Portfolio Management 

Actively managed portfolio strategies aggressively seek to outperform broader market indexes through informed security selection and deliberate tactical asset allocation shifts. These concentrated portfolios require advanced market knowledge, robust research and nimble trading to capitalise on perceived market inefficiencies or pricing anomalies in pursuit of market-beating returns. Although fees run higher in absolute terms, the potential to exploit an inefficient market’s excess return can justify additional expenses for seasoned investors. Common active portfolio tactics include:

• Individual Security Selection: Rigorous financial analysis guides targeted stock picking.
• Active Mutual Funds: Professional investment managers aim to beat benchmarks  via security selection and sector bets
• Dynamic Asset Allocation: Make calculated asset class mix adjustments to capitalise on macro trends and valuation extremes.

Income-Focused Portfolio Approach  

Income-centric portfolio strategies prioritise generating steady cash flow from dividends, interest and other recurring distribution sources. These income-focused portfolios aim to produce consistent cash flow returns to investors across varied market cycles while still participating in some asset appreciation over time. This helps investors match reliable investment cash flows to ongoing retirement income needs. Key income portfolio strategies include:  

• Dividend Paying Stocks:  Companies share consistent profits with shareholders via rising dividend streams.   
• Bond Ladders: Series of individual bonds maturing over sequential years to smooth income production.
• Covered Call Option Strategies: Selling rights to future stock gains in exchange for current cash flow.

Socially / Environmentally Responsible Investing   

Socially responsible investment strategies apply predefined environmental, social responsibility and corporate governance screens in selecting portfolio components. These approaches enable investors to align investments more closely with their ethical issue priorities or values without entirely sacrificing financial return objectives. Common socially focused investment approaches incorporate:

• ESG Positioned Mutual Funds / ETFs: Emphasize corporate sustainability initiatives and metrics.
• Community Investing Programs: Invest locally through area credit unions   
• Shareholder Advocacy Campaigns: Influence corporate behaviour shifts via shareholder proposal efforts and proxy voting participation  

In reality, the optimal investment portfolio strategy aligns closely to investors’ specific life cycle stage, financial objectives, personal values and risk preferences. As such, constructing tailored, customised portfolios representing prudent combinations of the above core approaches enables tightly calibrating to unique investor situations.  

Keys to Investment Portfolio Success

Regardless of which specific portfolio strategies investors ultimately decide to pursue, committing to several fundamental, historically validated guiding principles sets the stage for achieving long-term investment success. Those essential wealth-building pillars include:  

• Minimise Portfolio Expenses

Prioritising the minimisation of investment fees, trading commissions and taxes leaves more money working on behalf of investors. This directly translates to improving ultimate net returns. Low-cost, passively managed index funds or ETFs reflect a near-perfect starting point to curb portfolio costs.

• Broadly Diversify Your Holdings 

Owning a strategically determined mix of differentiated non-correlated asset classes protects against any single investment category or narrow market segment significantly hurting portfolio returns. Consistently rebalancing back to target long-term policy allocations maintains intended diversification through varying market cycles.

• Invest as Early as Possible

Given the immense power of compounding over multi-decade periods, initiating investment portfolio savings even in modest amounts as early as possible allows invested dollars to grow exponentially thanks to the snowball effect. 

• Reinvest All Investment Earnings 

Opting to automatically reinvest dividends, interest payouts, capital gains distributions and other investment earnings back into additional portfolio holdings serves as rocket fuel for compounding gains over the long-haul. This transforms portfolio paper profits into tangible future purchasing firepower.  

• Embrace Long-Term Time Horizon 

Tuning out reactionary market noise, embracing occasional volatility instead of overreacting, and always evaluating portfolio decisions through a long-term lens represent a vital wealth-building perspective. Avoiding emotional moves like selling out of temporary panic almost always pays off over time.

• Allow Time to Achieve Goals 

Resisting the temptation to reach for unsustainable double-digit returns, investors focused on amassing enduring wealth accept that reaching the most critical financial targets requires decades, not years or months. Have realistic return assumptions and exhibit patience over long time frames.

Making a steadfast commitment to these core, historically validated guiding principles when thoughtfully constructing and sticking to acitively managing your investment portfolio vastly improves the likelihood of achieving financial freedom.

Conclusion

Following a structured, diligent process focused on research-supported best practices substantially boosts the probability of successfully developing and managing a properly diversified, low-cost investment portfolio tightly aligned with your predetermined risk tolerance and financial aspirations. Those vital wealth-building portfolio tenets include:

• Clearly define all investment time horizons based on specific financial goals. 
• Strategically allocate investment dollars across complementary asset classes.  
• Construct your portfolio using competitively priced mutual funds or ETFs. 
• Monitor all holdings to guarantee continued alignment with targets.  
• Rebalance methodically back to original asset allocation levels.  
• Minimise associated expenses, turnover and taxes wherever possible.

Commitment to these core portfolio construction and management principles hands you the best odds for investment achievement over the long haul. Pursue your financial targets with patience and perspective.

That said, you can move on and look at various other concepts to help you become a better investor. In the upcoming chapter, let us thoroughly examine investing in foreign stocks that can become a part of your portfolio.