Building and managing a portfolio requires systematic
approach and careful planning. Following general guidelines could be useful in
creating and managing a portfolio:
1. Assess your fund availability: Take stock
of your funds available for investment. They may be in the form of cash, in the
bank account or loans with friends and relatives or any other form.
2. Establish your investment objective: This
is a very subjective aspect of the process. There are a number of factors that
influence the objective, to name a few: age of the investor, other income
sources, risk tolerance etc. Some investors may aim at capital preservation or
some may expect monthly income.
3. Set aside a portion of your funds for emergency
requirements: It is important to have a reserve for emergency
requirements. Once the funds are invested, it may not be possible to withdraw in
a short notice without incurring losses. It is advisable to keep these emergency
funds in a bank account or money market mutual funds.
4. Based on
your investment objectives and risk/return profile, develop an asset allocation
strategy: That is, decide what percentage of your portfolio would be
invested in stocks, bonds, mutual funds etc. Your asset allocation will be
dynamic and would change with the market situation. For example, when the market
seems to have reached its top, you would increase the fixed income allocation.
Conversely, when it seems to have reached its bottom, you would increase your
stock allocation.
5. After
deciding on the asset allocation, decide upon the sector allocation within each
asset class: For example, if you are investing 50% of your portfolio in
stocks, you should determine how much of it would be invested in
telecommunication sector, how much in tech stocks, how much in banking etc. The
factors to consider are the growth prospects of the sector and the correlation
between the sectors. The lower the correlation, the lower the portfolio risk
would be.
6. Security
selection: Within each sector, select the stocks that are undervalued
according to your analysis and bonds that offer the best yield given their
credit ratings.
7. Benchmark
each asset allocation of your portfolio against some broad based index:
For example, investments in US equities can be benchmarked against the S&P 500
Index while investments in Saudi market can be bench marked against the Tadawul
All Share Index.
8. Rebalancing:
Monitor and adjust your portfolio on regular basis.
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