Steps to Construct a Great Investment Portfolio – A Guide for Smart Investors

It is easy to get overwhelmed by the information overflow from all sources. Separating the useful information from the noise and building investing resilience is crucial for navigating the complexities of financial markets. Here are some steps to help you stay focused and make informed decisions:

Educate Yourself: One of Benjamin Franklin’s famous quotes is: “An investment in knowledge pays the best interest”. Invest time in understanding the basics of investing like types of risk profiles, different asset classes, asset allocation that involves allocating financial resources to various asset classes based on risk profile, investment strategies, etc. Knowledge is the best defence against misinformation and hype. Knowledge can save you from falling prey to the prevalent mis-selling.

Filter Information: Filter out reliable sources and don’t fall for sensational news and articles. Prioritise what you need to know and cut the noise. To cross-check information, look at authentic sources. For example, for information on mutual funds check sources like SEBI, AMFI, AMC website, etc. For information on companies check sources like SEBI, BSE, NSE, MCA, company website, etc.

Define Your Goals and Risk Tolerance: While setting financial goals, ensure they are SMART: Specific, Measurable, Achievable, Realistic, and Timely. Assess your risk profile by taking a risk assessment questionnaire to understand whether you have an aggressive, moderate, or conservative risk profile. Having clearly set out SMART financial goals and understanding your risk tolerance is important. 

The next step is to select financial products based on risk profile and map them to your financial goals. Having a well-defined goal plan by mapping investments to your financial goals can help you stay focused on them in the long-term till they are achieved. A clear focus will eliminate/reduce the temptation to react impulsively to short-term market fluctuations. 

Diversify: Don’t place all eggs in the same basket is an old adage. It has high significance in investing. Investing across asset classes like equity, gold, fixed-income, etc., creates a low commonality of risk and helps earn better risk-adjusted returns on the portfolio. There is little to no correlation among these asset classes. Hence, you should diversify your investment portfolio across them. Mutual fund schemes like hybrid and multi-asset schemes can provide you exposure to multiple asset classes within a single scheme.

Apart from diversifying among asset classes, you should diversify within the asset classes also. For example, within equity, you should diversify further within large, mid, small, and micro-caps. Mutual fund schemes like flexi and multi-cap funds provide you a combination of these within a single scheme. Within equity, you can also diversify within domestic and international equity. 

Asset classes take turns to outperform each other over the years. Hence, having a portfolio diversified across asset classes helps. You should also diversify across geographies to reduce country-specific risks. You can diversify between developing markets like India, China, etc. and developed markets like the US, Europe, etc. 

Stay Calm During Market Volatility: Markets never move in a linear direction. Volatility is inevitable. There will be many small and some big corrections on the way. Markets have seen sharp cuts during events like the sub-prime crisis, demonetisation, the Covid pandemic, etc. However, after every market fall, whether small or big, there has been a recovery. 

After every bear market, there is a bull market and a new lifetime high. Hence, you should stay calm and invest through the systematic investment plan (SIP) mode for the long-term. Reacting to short-term market fluctuations, chasing the most popular idea, etc., can lead to costly mistakes. Understand investing is a marathon and not a sprint. Map your investments to your financial goals and stick to them to achieve long-term success.

Monitor Your Investment: It is essential to avoid obsessively checking your portfolio. However, regular monitoring can help you stay informed about changes in the investment environment and consider necessary action. A portfolio review is recommended once in six months to a year. During the review, if some mutual fund scheme is not performing on expected lines, it may be replaced with an appropriate one.

Some asset class(es) may have performed exceedingly well or below expectation, resulting in a considerable change in the base asset allocation. During the review, you may rebalance the portfolio. To rebalance, sell the required quantity of the outperforming asset class(es). The sale proceeds must be invested in the underperforming asset class(s), to revert to the base asset allocation.

Seek Professional Advice: It is natural to feel overwhelmed in today’s age of information and data. The best way to overcome this is to seek professional advice. A qualified and experienced professional can offer guidance basis your financial needs and goals. 

For example, they can help you identify and prioritise financial goals, assess your risk profile, make a goal plan, identify appropriate financial products and invest in them, follow appropriate asset allocation, review the portfolio regularly, and handhold you till the financial goals are achieved. Thus, a professional can be your guide and help you throughout the financial planning journey.

Learn From Mistakes: Investing is all about evolving over time and learning from mistakes. Avoid dwelling on past errors but use them as opportunities to become a better investor. All the investment greats have had their share of mistakes. Admitting mistakes and learning from them created better investors out of them.

Building Investing Resilience Is the Key to Achieving Financial Goals

To achieve your financial goals, building investing resilience is important. You can do it by defining your financial goals, mapping investments towards them, and staying focused till you achieve them. Markets will be volatile; there will be corrections, and the news flow will predict gloom and doom scenarios. However, a razor-sharp focus on goals can sail you through the tough times so that you can enjoy the good times. You should empower yourself with the proper knowledge so that you can cut through the noise. Have a professional advisor throughout your financial planning journey who can guide and handhold you till you achieve your financial goals.