How to Construct a Successful Investment Portfolio
Scared to start? That’s okay! Your investment portfolio can start small yet effective, and you don’t have to do it alone
- You need a clear understanding of your investment goals before you start constructing your personal investment portfolio.
- You can build a portfolio from scratch by yourself, but if it feels too overwhelming to do so, consider engaging a financial advisor or even open an account with a robo-advisor
- It is important to reassess and rebalance your portfolio periodically; don’t leave it sitting there after you’re done!
Your investment portfolio is a collection of all the financial assets you own.
It’s not necessarily a single physical or digital space as your assets may be split up in various brokerage and bank accounts. If you already have a collection of financial assets, try creating a portfolio document or using a portfolio tracking application to keep track of everything that you own. Making such choices will help you make sound financial decisions for your investments.
Here are some examples of portfolio tracking applications you can use, which are all available on both your web browser and your mobile devices:
- SGX Mobile
- Yahoo! Finance
Do note that each platform has limitations and may not cover the entire range of products available in the market.
Why Do I Need to Look at All My Assets as an Overall Portfolio?
Pulling everything together and looking at it as a portfolio allows for efficient financial tracking, implementation of asset allocation, and protection through diversification.
With all your financial assets being under one roof, it will be easy and quick to take stock of what you have. You get to see your current financial standing at a single glance!
After you have determined the appropriate asset allocation that you should have, you will need to implement that allocation. Tracking all of your financial assets will allow you to implement and monitor your asset allocation with ease.
Diversification helps you stabilise your investment returns. It increases the chances that when one area of the market suffers a major setback, not all of your assets will suffer, and the dip in your financial position need not be devastating at all.
Having a comprehensive overview of all your financial holdings is essential to building up an optimal portfolio - every investor’s dream. Here are some basic steps that you should follow:
Step 1: Determine Your Asset Allocation
Before you start building your portfolio, it’s important to understand your investment objectives! This will help you determine what types of investments and how much of each type you should be buying.
When you start purchasing assets to form your portfolio, you should try to stick to the asset allocation you have decided upon. Of course, this asset allocation isn’t rigid. You may change it whenever you see fit, such as when your risk appetite changes.
For those using robo advisors, it is typical for them to give out a questionnaire while or after you have registered for an account. These questionnaires tend to ask questions about your risk appetite, time horizon and financial objectives to help determine your asset allocation and portfolio construction.
Step 2: Open Appropriate Accounts
If you haven’t bought any financial instruments before, well, it’s time to start! You’ll need two things:
- A brokerage account or a dealer/remisier for purchase purposes; and
- A custodian account for storage purposes
Purchasing Account Options
Online trading has gained traction in the past few years due to its convenience, ease of use, and autonomy. If you’re familiar with financial markets and can do your own research, online brokerage platforms may be an obvious answer to your investing needs. Sure, most platforms do have articles and general advice to guide you along, but at the end of the day, that can only help so much. You’ll be settling your own trades and deciding for yourself as to what best suits your needs. It’s best to start using these platforms once you have a firm understanding of investment basics.
However, just because you’re doing everything by yourself does not mean that you need to be on your brokerage platform 24/7. In fact, it's much better if you are not! There are several automatic functions that you can make use of online brokerages. Here are two of the most useful ones:
- Stop-Loss Order: set a price mark where you will automatically sell your holdings to cap your losses (set below the current market price) - just in case the price continues falling past this price instead of bouncing back up.
- Buy Limit Order: set a price mark below which you will automatically buy the financial instrument (set below the current market price) - this is when you expect the price to rise but don't want to keep buying all the way up.
Most online brokerage platforms nowadays offer a variety of products in a variety of geographical markets!
It may seem that each brokerage has an overwhelming amount of investment products to choose from. That’s true. The financial world is vast and product types are plentiful. To help you out, some of these brokerages do have real human beings on standby.
Dealers and Remisiers
If online broking feels too complicated and stressful, maybe getting tips, ideas and general advice from another human being will be more suitable for you! Dealers and remisiers provide professional advice on financial products and will help carry out trades for you. You won’t need to settle trades by yourself! Of course, this added personal service will come with a higher commission rate (everyone has to make a living, right?).
That said, while using dealers and remisiers may be a less technically demanding way of trading financial products, you should still err on the side of caution. This is because you’re dealing with a single point of contact, which is your dealer or remisier.
Here are some actions you can take to keep your finances safe:
- Conduct a basic check on your remisier with the brokerage firm regularly
- Check your account statements regularly to make sure that all is in order
- Do your own due diligence on the investment ideas recommended by your remisier
Storage Account Options
On the other hand, custodian accounts are brokerage-specific. Any purchased financial instruments are held in the brokerage’s custody, and any transactions involving those instruments must be done through the brokerage itself.
Look out for all the fees charged for investments held in your custodian account, such as maintenance fees or corporate action handling fees. Not all custodian fees are equal!
Step 3: Picking From the Respective Asset Classes
Now, it’s time to buy financial assets using your brokerage accounts! However, what should you choose? You have already decided on the allocation between asset classes, but diversification does not stop there! Diversification within each asset class is important as well.
For example, when choosing between shares, you can classify them into different subclasses, such as by geographic location, type of industry, or the underlying company’s market capitalisation. In general, we would caution against taking very active views on markets.
If you want a “shortcut”, you can consider investing in unit trusts and ETFs. These are basket collections of financial assets like shares and bonds. They’re usually already highly diversified! Some unit trusts and ETFs span across asset classes and geographies, while others have less diversified mandates and are more targeted to an industry sector, geography or theme (or a combination of them).
Do note that you still need to pay attention to the contents of any unit trusts and ETFs you buy to guarantee that, in your overall portfolio, you are diversified in the way you want to be and that your asset allocation is met.
When referring to ESG, we are talking about an investment’s Environmental, Social and Governance practices in conjunction with more traditional finance measures. In recent years, the popularity of ESG investing has skyrocketed as investors have become aware that their investments can achieve more than just returns. Options include ESG bonds, ESG investment funds and ESG shares.
Core-Satellite Portfolio Strategy
You can also choose to adopt the core-satellite concept for building your portfolio. This method involves a passive portion of your portfolio, known as the “core”, and an active portion, known as the “satellite”. The core should make up the bulk of your portfolio (ideally 60-80%) and provide you with slow, steady, long-term returns, usually aiming to track market indexes. The satellite portion is for chasing returns in higher-risk, higher-return investments, though this does not mean you have to trade them aggressively and all the time!
Don’t feel pressured to get your portfolio up and ready immediately. Take your time to find the right assets for your portfolio. Besides, as your income comes in, your portfolio capital will also grow, so it’s important to set a realistic pace for yourself. Several investment strategies make use of disciplined investing over a period of time, such as dollar-cost averaging.
In Dollar-cost averaging, you split your purchase into separate periodic transactions. You will commit a fixed amount of money to invest in a particular asset regularly. This aims to benefit from price volatility when you buy and takes away the human element of trying to time the market (on top of the already difficult decision on what to buy)!
Step 4: Reassess and Rebalance Periodically
Over time, when the values of your financial assets change, your portfolio weightings could well stray far from your initial weights. The current market value of your financial assets determines your portfolio weightings, after all, not the initial amount of money you put in. The market doesn’t care what price you bought at. That information is only useful to you to determine your gains and losses!
Determine which asset classes, or even the subclasses, in each asset class are now over-or under-weight and make the adjustments accordingly by rebalancing what you have and/or allocating new funds towards the underweight assets.
You should periodically review your portfolio and make necessary adjustments to make sure that your portfolio stays in line with your investment objectives. If your objectives have changed, possibly due to a change in financial needs or a boost in confidence, fantastic! It’s time to update your investments to reflect this as well.
Don’t stay passive. It's a bad idea to constantly watch your portfolio, but it's important to do a check-up on it regularly! Every 6 months or every year is a common interval for many investors.
Alternative: Financial Advisors & Robo Advisors
Financial advisors are experts in the world of finance and are equipped with the skills to find suitable investments for you. They provide a human touch to portfolio management! You can engage with financial advisors in banks, and insurance companies or search for independent financial advisors. None of them work for free, so, of course, have to earn fees one way or another, which is fair given the expertise and service they bring to the table. However, it's important to not be shy about asking what they make from working with you and then deciding if it's fair for you.
If you want a cheaper alternative, you can consider robo advisors too!
It is important to do your due diligence to check that any robo advisor or financial advisor you approach is suitable for you. Their advice may differ from one another and be skewed towards certain financial products.
Remember that the most important step is not only to track all of your investments periodically but also to maintain diversification. Don’t become so caught up in chasing returns that you forget to protect yourself against possible losses. And don't get so caught up in minimising/avoiding risk that you miss out altogether on potential long-term gains to your wallet and the quality of life from investing!
PORTFOLIO BUILDING. COMPLETED. ✅