The First Step to a Profitable Portfolio

(eToro Blog) Having a good portfolio is key to a trader’s success, but knowing how to properly allocate to achieve that successful and profitable portfolio will depend on several factors, not the least of which is your personal goals, risk threshold and trading strategy. In the end, your portfolio ought to meet your future capital needs even while giving you peace of mind in the present. Experts suggest a systematic approach to designing your portfolio, and to reallocating it as and when needed.

A determination of the right asset allocation for you is your first task; what must be considered are the answers to these questions:

How much capital do you have to invest?

When do you expect to achieve your investment goals?

What are your future capital needs likely to be?

How much risk are you willing to take on given those answers?

All of the answers are particular to the trader and will serve to if not dictate then direct their investment strategy. For example a single college graduate at the beginning of his career path might have different goals than an older individual with a family to support and retirement plans on the horizon and that will affect the decisions they make when determining their portfolio allocation.

Consider too the kind of risk taker you are or that you think you are. Some traders are more willing to take on additional risk for a shot at a greater return and despite some headwinds and losses don’t dwell on them but move on. Others suffer a small loss of capital due to a short-term drop and can’t sleep a wink thus even the potential of a greater return won’t seem worth the worry. Your individual risk tolerance can help you choose among asset classes to those more appropriate for an investment strategy and will largely determine whether you are a conservative or aggressive investor. The more aggressive you are as an investor, the more risk you can accept while the reverse is also true.

While indices and equities are generally considered a good choice for a more aggressive investor, so too are some currency pairs, but certainly not all. The safe haven currencies like the Swiss Franc, the Japanese Yen and the U.S. Dollar are all relatively safe against the volatility and uncertainty of the higher risk and commodity-linked currencies like the Euro, and Australian and Canadian Dollars.

As with any portfolio allocation, unless you have an ultra long strategy which dictates otherwise, the best strategy is to periodically evaluate your portfolio and get rethink the strategy for non-performing investments. It’s a reality that as much as 90% of a portfolio’s return is based on the allocation decision, so it is prudent to periodically review it to ensure that you maximize your portfolio’s potential. On OpenBook, that will include not just your asset allocation but your people-based portfolio if you copy any of OpenBook’s hundreds of gurus.

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