As you begin to build your investment portfolio,
have your end goal in mind. What is the purpose?
The joy of beating the market? Secure retirement?
A current income? With your purpose in mind,
you can plan the portfolio around it. Most long
term investors suggest at least a 3-5 year timeline.
Markets go up and down. Losses happen. Profitable
trading is more likely to happen when you give
yourself ample time to recoup losses and build on
gains.
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Within your portfolio you want to balance risk,
profitability, and diversity. Investors trading in
traditional accounts can build diversity by choosing
mutual funds, indexed funds, and exchange traded
funds (ETFs). Each of these equities lets you buy a
basket of assets with one purchase. By choosing
from different geographies, sectors, and kinds of
assets, you can build a diverse portfolio.
The kinds of assets you choose within those funds
or indices will be based on your risk tolerance and
the profitability you seek. A small cap fund carries
more risk and perhaps more potential profits than
the more conservative index of large, established
companies. But this is not always true. When you
have studied the cycles and the trends, you may
find some assets that appear secure may actually
carry more risk. And you may find some equities
considered risky that have lower risk because you
know the trends.
Once you’ve chosen an asset based on fundamental
principles, trust your decision. Of course, you’ll use
stop losses to protect from a dramatic downside.
But then, let your asset run up to your profit goal.
Don’t second guess each time there’s a dip in the
market. Most investors lose money because they
let fear take the upper hand. They sell in a dip and
then lack the confidence to buy as the asset moves
up. Wise investors choose assets based on sound
principles and then stay the course unless the
fundamentals change.
If you decide to go with individual equities rather
than a fund or index, go with quality rather than
quantity. Choose about 10 excellent assets to begin
with. Making them best in class is a good balance
between risk and profitability. Well researched,
single assets may outperform an index that is
diluted with lesser picks, but, because all your eggs
are in one asset, it typically elevates your risk.
7.1 Balancing Risk, Profitability, and
Diversity
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Knowledgeable day trading or swing trading may
also be a way to build a portfolio with a portion of
your assets. Copying successful traders gives you
the potential for higher returns and tight trading
stops can give you prudent risk management.
When you use CFDs and copy trading you have an
accessible way to diversify your portfolio over an
immense range of asset classes. You may profit
from both rising and falling markets. With eToro’s
platform, you can also assess the risk of each
trader. Still, CFDs are considered high risk trading.
Most investors don’t have enough money to start
with one lump sum and grow it into a huge nest-
egg. They need to continually add to the money
they have available to invest. This means making
weekly or monthly contributions to their investment
portfolio.
Take stock of your current budget and find ways
to free up money for long term wealth building. As
with all ways to free up money, it comes down to
either spending less or earning more… or both.
The sooner you start your regular investing, the
larger your portfolio is likely to become and the
faster you may achieve your goals. Your consistent
periodic investment produces large benefits. It
gives investors that chance to benefit from years
of compounding interest.
Look at the graph. It assumes you start with $100
and add $100 a month, in 50 years your total
investment will be $60,100. But with a moderate
rate of return, even including periodic drawdowns,
a stock market calculator suggests a possible end
value of $8,208,000 return.
7.2. Regular Additions to Your
Wealth-Building Fund
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Notice how the majority of the gains come at
the end of the time period. If you invested $100/
month for only 30 years, your total estimated value
would be about $409,704, or under a half a million
dollars. Of course your actual outlay would also be
lower, only $36,100. Yet you’d still see your money
multiplied by more than 10 times! And remember,
the past is no prediction of future gains and all
investing carries the risk of loss.
Many investment advisors offer model portfolios.
They may have dozens based on your timeline,
your risk factors, and your goals. This is a simple
way to get started. If you’re not sure how to jump
in, go ahead and start with a standard portfolio.
It’s better to begin and then refine your asset
allocation as you move along. Morningstar has a
number of these generic portfolios for you to look
at.
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The limitation of standard models is that they may
not exactly address your level of risk, your age
and timeline, or your goals. Also, many financial
investors do not have your best interests at heart.
They may suggest mutual funds or other assets
that pay them larger commissions at the expense
of your returns.
If you can trade CFDs on a social trading platform,
you open your portfolio possibilities. It’s easy to
match your goals, age, and risk factor to tailor a
portfolio exactly to your needs.
Let me show you how it works on the eToro site.
As soon as you create a profile on the site, you
can deposit funds. Or you can experiment for
a while as a virtual trader and see nearly all the
investment tools you need to make good choices.
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7.3 Using Model Portfolios and
Copy Trading
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You have the chance to personalise a watchlist
so at a quick glance you can assess how equities
you are following are performing. You can see the
percentage of people buying or selling the assets
you follow so you can gauge whether you want to
do the same.
But most importantly, you can click on the copy
people site and find instant access to model
portfolios. First, check the risk score to find one
you think you might be compatible with. Then
look at other pieces of information. You may want
someone from your own country or you may
choose to follow a Popular Investor who has a
large following or one that has produced returns
you seek.
Do remember all trading carries risk. Also know
that past performance does not guarantee future
returns. There may have been an anomaly that
produced either extra-ordinary or disappointing
results. Your next step is to click on the synopsis
of someone you think you may want to copy. There
you will be able to see the securities they are
investing in. Make sure the assets they are invested
in fit with your strategy.
You can even delve a little further to gain insight into
their thinking. You’re free to ask them questions on
the feed. When you click on any one asset, you’ll
see when they bought it and what their target profit
goal is. You can also check out past performance
and risks. Finally, with one click you can copy their
entire portfolio and follow their trading decisions.
When you know your goals, timeline and risk level
it’s easy to check each Popular Investor portfolio
against your measurments to see how they mesh.
You can also go one step further. Look at each
asset in the trader’s site to see how well it adds
to the diversity you want. And researching the
companies in Popular Investors’ portfolios can help
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you see how they are distributed into the different
sectors and classes.
Know that you can exit an individual trade of any
trader you copy at any time. It’s a one click process.
So if you keep on top of the traders you follow, it’s
easy to keep your diversification in mind, and in
check, by exiting trades that don’t fit your strategy.
eToro also offers several CopyFunds™ selected
by sectors or assets similar to ETF’s. What makes
CopyTrading an ideal way to create a portfolio is
that you don’t have to choose just one portfolio.
You can collect a basket of different traders you
want to follow. The platform will seamlessly buy
and sell the fraction of your investment you allot
to each Popular Investor exactly as they trade.
Because the site is so liquid, you can easily change
Popular Investors whenever you want. Creating
your perfect portfolio could not be easier.
Your capital is at risk. Past performance does not guarantee future results. This information is for educational purposes and not investment advice.
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