Simply put, a portfolio is a collection of investments. At a beginner’s level, a portfolio will mean bank deposits, post office savings schemes, company fixed deposits, and the like. As one goes through life other instruments such as a unit-linked insurance policy, tax saving bonds, or a site somewhere may add on. Somewhere along the way, it begins to resemble a junk box that you will not want to touch! So how do you make a junk box into a jukebox that plays the music you want?
For that, you need a 3D Portfolio. And here is how you get one.
This is the first D without which all else becomes irrelevant. As the saying goes, a ship without sails goes nowhere. The sails give direction to your journey. Likewise, for this to happen to your portfolio, you will have to answer the question what is it that you want your portfolio to do? There has to be a goal that you will have to quantify.
“Every goal costs money and the day that you have a life goal that does not cost money, rejoice, for you have evolved!”
Commonly desired goals are retirement, education, holidaying, etc. Remember, you can make a savings plan only after quantifying the goal. The keyword here is ‘plan’ as it means that there is an action plan and a timeline to achieve the goal.
Can you even imagine a randomly built house? If it isn’t a joke, it is a nightmare for it can collapse anytime. A house that fulfills its utility needs an intelligent design; the same goes for a portfolio. It needs an intelligent design. What are the elements of a portfolio design?
It needs to be built according to the timeline – how many years do you have before the money is required? The elements of the portfolio are chosen such that they have the highest probability of success in the given time period.
It needs to be diversified, meaning that it should have different types of investments. Those that behave differently from each other. For instance, a bond or deposit behaves very differently than equity and a piece of land behaves very differently from equity or bond. The design should be having the right proportion of each of the asset classes, bonds, equity, and real estate.
The portfolio design determines the kind of returns that can be expected. Do you want to beat inflation and make real returns? Do you want capital protection? Do you want anytime liquidity for emergencies? Does it need to be tax-friendly? Based on the answers to these or any such questions the elements are to be combined.
Even if it is an all-equity portfolio, how much of large companies and how much of mid-sized or small companies? Does it need to be defensive or aggressive? Growth or Value? Or a blend?
If it is bonds, do you want high safety AAA bonds only? Or some lower-rated papers will do to increase portfolio return (and portfolio risk)? Do you want short term bonds or long term is acceptable?
How much risk or uncertainty can you tolerate? If it is less risk you desire, you need a conservatively constructed portfolio; if it is more risk that you are willing to take, you need an aggressively designed portfolio. All these factors go into portfolio design.
Your portfolio needs some tender love and care to grow. Not too much, or you will spoil it. But once a year or so you must review your investments for one cannot go forth with the assumption that once you have made the investment it can be forgotten till the time comes to sell it and use the funds. Ideally, review the portfolio with your advisor to check if it remains in alignment with your risk profile and goals. A review is a good time to rebalance the portfolio if required, weed out bad ones and add to the good ones.
So, to get a portfolio that works, follow the 3D principle.
This is how most successful people and organizations convert their Junk boxes into Jukeboxes. Reach out to me or my team if you want to discuss further. Until then, happy portfolio building and happy saving.