Three tips for building a good portfolio

The first step to building a sound investment portfolio is to know why you’re investing

 

Be deliberate

Setting measurable investment goals gives investors clarity and direction, and prevents them from falling into common investment traps like chasing unrealistic market returns or being overly influenced by transitory factors like product fads or short term performance.

Before you invest a single dollar, ask yourself what are your key reasons for growing your wealth – is it to fund retirement? Or perhaps work towards a house deposit? By establishing goals at the outset, investors can get a better idea of their time horizon and tolerance for risks – two important factors that contribute to developing the right asset allocation.

More is not always better

Without a plan, investors often build their portfolios from the bottom-up, focusing on each investment holding rather than the portfolio as a whole, and often lacking the diversification needed to adequately mitigate market risks.

Diversification is not necessarily about owning more securities, but rather the right mix of securities.

Investing in several bank shares instead of just one may help mitigate single security risk but concentration risk remains high given the single industry focus.

Similarly, investing solely in ASX-listed companies increases diversification across sectors but remains concentrated in the local market.

Conversely, investing in a broad-based Australian shares ETF (such as VAS) alongside another ETF that provides broad international exposure (such as VGS) is an example of how investors can diversify not only within markets but also across regions.

Remember, markets will often behave differently from each other—sometimes marginally, sometimes greatly—at any given time. Owning a diversified portfolio with exposure to different markets allows the investor to participate in stronger performing areas while also mitigating the impact of weaker areas.

Focus on what you can control

Lastly, two of the most important qualities to have when it comes to investing are not the ability to pick winning stocks or to perfectly time the market, but rather the ability to maintain both discipline and perspective even when conditions get tough.

These two qualities are instrumental in helping investors remain committed to their long-term investment plan through periods of market uncertainty.

While deciding on the right asset allocation is one of the cornerstones for successful investing, it only works if the allocation is adhered to over time and through varying market environments.

This means ignoring the temptation to alter asset allocations when markets are volatile and succumb to the appeal of market-timing, even when there appears to be visible winners and losers. This is because the opportunities that are clear in retrospect are rarely visible in prospect; investors cannot control nor predict what markets will do but they can focus on their own mindset and approach.

 

 

 

Vanguard
vanguard.com.au

More Articles

TRANSITIONING INTO RETIREMENT: WHAT YOU SHOULD KNOW

Deciding on your retirement funding options comes down to personal choice. . If you’re close to...

Read full article

The Deadliest pandemics in History

Check out the Deadliest pandemics in...

Read full article

Middle-to-higher incomes boosting SMSF growth

The SMSF sector experienced healthy growth over the March quarter, with men and women on middle-to-higher...

Read full article

The superannuation changes from 1 July

The super changes on the way from the start of the 2024-25 financial year. . A number of...

Read full article

Investment and economic outlook, May 2024

Region-by-region economic outlook and latest forecasts for investment returns. . For the last...

Read full article

Downsizer contributions can be time critical

With the expansion of the downsizer contribution, the timing of when it is used can affect how to use...

Read full article

Deeming freeze a win for Age Pensioners

Why the decision to keep deeming rates on hold may be a window for interest rates.   . In...

Read full article

Plan now to take advantage of stage 3 tax cuts

With the stage three tax cuts set to be implemented in around six weeks, opportunities for tax-saving...

Read full article

Sofie Korac is an Authorised Representative (No. 400164) of Prudentia Financial Planning Pty Ltd, AFSL 544118 and a member of the Association of Financial Advisers.

Financial Advice Sydney and the North Shore Office based in Gordon NSW

Financial Services Guide - Disclaimer & Privacy Policy

^