Strategies To Optimize Your Investment Portfolio's Performance

An investment portfolio is a collection of financial investments like stocks, bonds, commodities, cash, and cash equivalents, including closed-end funds and exchange-traded funds (ETFs). The core of a portfolio is usually made up of stocks, bonds, and cash, but it can also contain a wide range of other assets, such as real estate, art, and private investments.

A well-diversified portfolio is vital for an investor's success. It should meet your future capital requirements and give you peace of mind. Investors can construct portfolios aligned with their investment strategies by following a systematic approach.

The first step in building a portfolio is to determine your investment objective. Are you investing for income or for growth? This will shape the types of investments you make. The next step is to decide on your level of risk tolerance. Higher-risk investments can generate high rewards, but they can also result in large losses.

Other steps to building a profitable portfolio include picking the individual assets for your portfolio, monitoring the diversification of your portfolio, and making adjustments when necessary.

Diversification of investments

Diversification is a key strategy in investing, and it's important to understand how it works when shaping your portfolio. Diversification is the practice of spreading your investments across different asset classes to limit your exposure to any one type of asset. This helps to balance risk and reward, reducing the volatility of your portfolio over time.

There are several ways to diversify your portfolio:

• Different asset classes: Diversification is often achieved by investing in different asset classes such as stocks, bonds, real estate, and cryptocurrency. Each asset class has a unique set of risks and opportunities. For example, stocks provide the most aggressive portion of your portfolio and the opportunity for higher growth over the long term, while bonds are generally considered less volatile and can provide regular interest income.
• Geographical locations: Investing in different countries can provide diversification benefits as economic forces in one country may not affect another in the same way. For instance, investing in Japanese equities and Australian bonds can give you exposure to different markets.
• Company sizes: Diversifying across different company sizes, such as large-cap and small-cap stocks, can provide exposure to companies with different risk profiles and growth potential.
• Industries: By investing in various industries, you reduce the impact of sector-specific risks. For example, investing in both travel and digital streaming entertainment can hedge against the risk of future pandemic-related shutdowns.
• Term lengths: Diversification can also be achieved by investing in income-generating assets with different term lengths. For instance, short-term investments like money market funds offer stability and easy access to your money, while longer-term investments like bonds may provide higher returns but with greater risk.
• Mutual funds and exchange-traded funds (ETFs): These pooled investments typically include a large number and variety of underlying assets, providing instant diversification.

It's important to note that diversification may not maximize your returns as it aims to reduce risk within your portfolio. By diversifying, you may limit your gains in the short term, but you also protect yourself from significant losses. Additionally, diversification can be time-consuming and incur more transaction fees and commissions.

When shaping your portfolio, it's crucial to consider your investment objectives, time horizon, and risk tolerance. If you're investing for income, you may focus on fixed-interest or equity income funds, while those seeking growth may favour equities or equity income funds with reinvested returns. As your financial situation changes, be prepared to adjust your portfolio accordingly, switching between growth and income assets as needed.

Risk tolerance

An investor's risk tolerance is influenced by various factors, including age, investment goals, income, and future earning capacity. For example, an older investor nearing retirement age may have a more conservative risk tolerance, seeking to preserve their capital and avoid significant losses. On the other hand, a younger investor with a longer time horizon may have a higher risk tolerance, willing to take on more risk for the potential of higher returns.

There are generally three types of risk tolerance: aggressive, moderate, and conservative. Aggressive investors have a high-risk tolerance and are comfortable with risking losing money to achieve potentially better results. They tend to focus on capital appreciation and primarily invest in stocks, real estate, or other riskier assets. Moderate investors, on the other hand, aim for a balanced strategy, seeking to grow their money while managing risks. Their portfolios often include a mix of stocks and bonds, such as a 60/40 or 50/50 structure. Finally, conservative investors have a low-risk tolerance and seek guaranteed returns with minimal volatility. They typically invest in low-risk vehicles such as bank certificates of deposit (CDs), money markets, or U.S. Treasuries.

It's important to note that risk tolerance is not static and can change over time, especially as an investor's financial situation, goals, and time horizon evolve. Additionally, risk tolerance can be tested during market downturns or economic uncertainties, such as the COVID-19 pandemic.

To determine one's risk tolerance, it's essential to ask oneself a few key questions: What are your investment objectives? When do you need the money? How would you react if your portfolio suffered significant losses? By considering these factors and seeking guidance from financial professionals, investors can make more informed decisions about their portfolios and better align their investments with their risk tolerance.

Asset allocation

When deciding on asset allocation, it's crucial to consider your investment goals, time frame, and risk tolerance. If you have long-term financial objectives, such as retirement, a more aggressive allocation with a higher proportion of stocks may be suitable. Conversely, for shorter-term goals like saving for a house, a conservative allocation favoring less volatile investments like bonds and cash may be more appropriate.

There are several asset allocation models to consider, including:

• Income Portfolio: This model allocates 70% to 100% of your portfolio to bonds, making it ideal for those seeking a steady income stream with lower risk tolerance.
• Balanced Portfolio: This model allocates 40% to 60% to stocks, striking a balance between growth and volatility. It suits investors with a mid- to long-range investment horizon.
• Growth Portfolio: This model allocates 70% to 100% to stocks, targeting high growth potential. It is suitable for investors with a high-risk tolerance and a long-term investment horizon.

Additionally, you can implement asset allocation strategies through different types of portfolios:

• One-Fund Portfolio: This approach utilizes a single target-date fund, which diversifies investments across various asset classes and gradually shifts towards more conservative investments as the target date approaches.
• Two-Fund Portfolio: This strategy employs two well-diversified index funds, one for stock allocation and the other for bond allocation, giving you more control over your asset mix.
• Three-Fund Portfolio: This model provides even more control by dividing the stock allocation between two mutual funds, one for U.S. equities and the other for international equities.

Remember, the right asset allocation depends on your personal circumstances and financial goals. It's essential to assess your risk tolerance and time horizon to make informed decisions about your portfolio's asset allocation.

Investment time frame

When it comes to investing, timing is everything. An investment time horizon refers to the period of time an investor expects to hold an investment before needing the money back. This is largely dictated by investment goals and strategies. For example, saving for a down payment on a house might be a short-term goal, while saving for retirement is a long-term goal.

Here's a breakdown of the different types of investment time horizons:

Short-Term Investment Horizon

The short-term horizon refers to investments expected to last fewer than five years. These are suitable for investors approaching retirement or those who may need a large sum of cash in the near future. Money market funds, savings accounts, certificates of deposit, and short-term bonds are good choices for short-term investments as they can easily be converted into cash.

Medium-Term Investment Horizon

Medium-term investments are those held for three to ten years, such as savings for a first home, marriage, or a child's education. Medium-term investment strategies balance high- and low-risk assets, so a mix of stocks and bonds is a sensible approach to protect your wealth without losing value to inflation.

Long-Term Investment Horizon

The long-term investment horizon is for investments held for ten or more years. Retirement savings are the most common type of long-term investment. Long-term investors are typically willing to take greater risks in exchange for greater rewards.

The Impact of Time Horizons on Investment Choices

The length of an investment horizon will influence the types of investments that are most suitable. Generally, the longer the time horizon, the more aggressive or riskier the investment choices can be. For example, stocks are typically considered riskier than bonds, so an investor with a long-term horizon might opt for a portfolio weighted heavily towards stocks.

Volatility is often a greater risk in the short term than in the long term. If you have a long time horizon, you can ride out frequent market moves. However, if you have a short-term horizon and the market drops, there may not be enough time for your portfolio to recover before you need to withdraw the money. Therefore, short-term investors often favour holding funds in cash or highly liquid vehicles.

Adjusting Your Investment Portfolio Over Time

As your financial situation changes, you should be prepared to adjust your investment portfolio. For example, younger investors saving for retirement might focus primarily on stocks to maximise the growth of their portfolio's value. Later in life, as they approach retirement and their risk tolerance decreases, they can concentrate their portfolios more heavily on bonds.

Similarly, investors with a long-term horizon can afford to be aggressive in their asset allocation at first, but as their investment goals draw closer, they may need to adopt a more conservative strategy.

Investment accounts

Utilize Online Platforms and Apps

Take advantage of online platforms and mobile applications that offer investment portfolio management services. For instance, Google Finance allows you to create and manage portfolios, track the performance of your investments, and compare them to other stocks and indexes. You can also use apps like MyFirstPortfolio, which provides a comprehensive wealth management solution, or iA Private Wealth, which enables you to monitor your portfolio and stay connected with your Investment Advisor on the go.

Diversify Your Investments

Diversifying your investment accounts can help balance risk and increase your potential for returns. Consider a mix of stocks, mutual funds, exchange-traded funds (ETFs), and even cryptocurrency. For example, the Acorns app offers diversified ETF portfolios built by experts, as well as the option to personalize your investments with a Bitcoin-linked ETF and a Custom Portfolio.

Stay Informed with Market Data and News

Staying up-to-date with market trends and news is essential for making informed investment decisions. Utilize resources like the Bloomberg app, which provides breaking news on world finance, business, and investments, along with market data and analysis. This can help you understand the broader economic landscape and make more strategic choices for your investment accounts.

Set Clear Goals and Track Progress

Define your investment goals and use your investment accounts to work towards them. Whether it's saving for retirement, investing for your children's future, or building wealth, set clear milestones and track your progress. Many investment apps offer goal-setting features and provide regular updates on your portfolio's performance, helping you stay focused and make necessary adjustments.

Ensure Security and Privacy

When managing investment accounts, it's crucial to prioritize security and privacy. Look for platforms and apps that offer two-factor authentication and data encryption. For instance, the iA Private Wealth app provides optional biometric authentication for added security. Additionally, review the data-sharing practices of the tools you use, ensuring that your personal and financial information is protected.

Frequently asked questions