Portfolio management is basically an approach of balancing risks and rewards. Investors should keep the following tips in mind while deciding about the right portfolio blend.
Goals: You should be clear about your goals as an investor. The objective of the portfolio management should be utmost clear if one wants to accumulate wealth by good returns or to hold on his investments.
Risk Tolerance: As an investor one should know how to handle the fluctuations of ever changing volatile market. It is important to know the ways for tolerating the risks and subsequent rise and fall of net worth. If you are not capable of handling the pressure of sharp decline in the values of tour investments then you should try to invest in more stable funds/stocks. By this way, you may not make the returns quickly however it can offer you sound sleep at night.
Know your investments: It is recommended to invest in the stocks/funds of the businesses and industries that you are aware of. You should know the activities of the companies and procure knowledge about the sector you are investing in. This way you would be able to know if the company will continue to be successful. The performance of the specific business or industry cannot be easily predicted with certainty.
When to Buy/Sell: In order to succeed in the stock markets, it is very important to know when to buy or when to sell. You should do every purchase with a purpose, and constantly re-assess that purpose as per the prevailing market and other conditions.
Measuring Return on Investment (ROI): The performance of the portfolio is measured by the return on investment (ROI). The individuals can successfully formulate a logical money-management strategy by knowing the probability of returns received by each dollar invested.
ROI = (Gains – Cost)/Cost
The ROI can change depending on the improvement or worsening of the market conditions. It also depends on the kind of assets or securities held by the investor. In general, the higher potential ROI involves higher risk and vice-versa. Thus, one of the major tasks of the portfolio management is the proper risk control.
Measuring Risk: The risk tolerance of the person determines the pace of his/her returns. The risks and rewards are in essence interrelated to each other where tolerance of the risks tends to influence or even dictate the rewards. An investor whose goal is to maintain his/her current assets instead of growing them, he/she will keep only safe and secure investments in the portfolio.
Diversification of the portfolio: The diversification of the portfolio is required to minimize the risks and maximizes the returns in the long term. It is preferred to diversify your portfolio however; one should take care to avoid over-diversifying. The diversified portfolio led to smoothing of peak-and-valley pricing effects caused by the fluctuations in the normal market and in surviving long term market downturns. The over diversification can become counterproductive so it needs to be avoided.
Avoiding the gambling: As an investor, one should avoid portfolio that relies on high-risk, high-return investments. It is because; the higher speculative investment can lead to conditions where investor may require selling his holdings prematurely at a loss due to liquidity crisis and expected returns won’t materialize.