ARE you currently experiencing fluctuations in your investments? Are you a trader or an investor?
These are the usual questions that we ask fellow investors this season. Because of the changes in the economic landscape, we are always emphasizing the importance of a diversified portfolio.
We always hear the phrase: “Do not put all your eggs in one basket” to manage risks and maximize profit.
Diversification is about having variety of investments. If we invest in vehicles that are not directly correlated, we can be more comfortable because if one asset class is not performing well, there’s a chance that the other assets will perform better. We should remember that investing is about discipline and strategic thinking, this concept will help you become wise in deciding where to invest.
Here are five steps that can help you achieve a diversified portfolio.
1. Know the risks of asset classes.
Each type of an investment has an inherent risks-and-reward ratio. For example, investing in the stock market or crypto-currencies brings more reward but, at the same time, it can also fluctuate high compared to other investment types such as money market funds, bonds or real estate.
Understanding the potential movements can help you decide if how many percent you will allocate in a risky type of asset. A classic example is dividing your portfolio into three asset type, let’s say you allocate 33 percent each for conservative, moderately aggressive and aggressive type of fund. This will bring in more security for you.
2. Consider Peso-cost averaging.
Add to your investments on a regular basis. If you have P10,000 to invest and consistently add the same amount on a monthly basis, you’ll buy more shares when price are low and fewer when prices are high. Steady investing can help you build your investment volume over time.
3. Set your entry and exit point.
In every type of investment, setting parameters will help guide us when to capitalize profits and mitigate losses. If you’re new to investing, setting sell or buy signal through fundamental and technical analysis can help you make a sound decision.
You may also get insights from seasoned investor but having your own conviction can help you grow in timing the market and aligning it with your goals and timeline.
4. Rebalancing allocation after five years.
Every time our life season changes, we may also consider rebalancing our portfolio allocation. For example, if you are single and have minimal responsibilities, you may take a more aggressive allocation to maximize returns. For someone who has a family and kids going to college, consider a moderate aggressive and conservative type of investments allocation to maintain the value of investments. Always check your season and goals to avoid losing your hard-earned money.
5. Study your options.
Choosing which platform suites you will entail additional time to study the pros and cons of asset types. Here are quick summary of asset classes.
1. Stock market
Investing in the stock market can be direct or indirect. Direct investing means that you will be the one to buy and sell your stock pick through online or traditional brokerage firms. If you are investing in stocks, it is considered a high risk, high return type of investment.
2. Real estate
Real estate is a type of asset that is lesser aggressive than the stock market. The value of properties increases over time and the demand is consistent depending on the location and development type. If you are planning to create passive income in the future, this can be a suitable type of investment for you.
3. Real Estate Investment Trust (REIT)
A REIT is a company that has income-generating real estate through rental properties. It is like mutual funds; REITs pool the capital of numerous investors. This makes it possible for individual investors to earn dividends from real estate investments without having to buy, manage, or finance any properties themselves.
Here in the Philippines, REITs are becoming famous because of the numerous launching since last year of major developers such as Ayala Land, Megaworld, Double Dragon and Robinsons Land. This can be accessed through online brokerage platforms.
4. Life insurance
Getting an insurance plan is one of the cheapest asset. Once you are covered with life, accident or health benefits, the company will shoulder the risks related expenses to avoid depletion of your savings and investments in other asset types. An adequate coverage can help you achieve a protection for your family in case of unforeseen life events.
Karlo Biglang-Awa is a registered financial planner of RFP Philippines. To learn more about personal-financial planning, attend the 92nd RFP program this October 2021. To inquire, e-mail info@rfp.ph or text at 0917-6248110.