Finding the fit: How to tailor your financial portfolio
Creating a financial portfolio specific to your needs can help make sure your investments work for you. What should you be considering to get started?
In tailor-fitting their financial portfolios, high net-worth investors easily have access to a wide array of instruments and expert advice from their own portfolio managers, investment specialists, or even private bankers. But for smaller investors like most of us, such services are not available considering limitations on portfolio sizes and fees . This does not mean, however, that we should not enjoy a certain degree of tailor-fitting.
Creating a financial portfolio that suits your needs does not have to be time- or energy-consuming. Thanks to technology, retail investors can now accomplish online or in-app questionnaires to determine their profiles and they are immediately provided with the recommended asset mix suited to their needs and investment outlets.
Our local regulations ensure that financial institutions conduct suitability assessment to determine objectives, risk appetite, and financial sophistication prior to selling any investment product. Some institutions that cater to retail investors have designed model portfolios per investor type.
These are some of the questions that will lead you to the most appropriate portfolio: Who are you investing for? Who will make the decisions regarding the funds? What is your overall financial capacity? What are the financial objectives of your portfolio? How much is your loss tolerance? Do you need a professional to make decisions for you? What is your actual investment experience?
If you are just starting to build a financial portfolio, I recommend pooled funds such as Unit Investment Trust Funds or Mutual Funds that are managed by reputable institutions. These pooled funds allow small investors to access markets and investment themes. Because of the low minimum amounts required, you can create a combination of several funds according to the asset mix appropriate for your profile, thereby achieving your own tailor-fitting.
It is also beneficial to create several portfolios for your different objectives. For instance, one portfolio may carve out a certain amount for near-term liquidity needs, second portfolio may be constructed for long-term capital growth, and third portfolio can be for generating periodic income for household needs.
In building or choosing a suitable portfolio, you need to fully understand its component assets, the potential returns, and the risks involved. It needs to be consistent with your objectives, horizon, risk appetite, and sophistication level. You should also consider your personal preferences and beliefs in choosing investments.
Just like our measurements, our objectives, needs and circumstances also change. Hence, our investment portfolios need to be adjusted accordingly. You may have a new capacity and sophistication to expand exposure into new instruments or sectors. If certain securities or funds in the portfolio are under-performing for specific reasons, it may be beneficial for you to shift.
To keep your tailor-fit portfolio constantly working for you, conduct a periodic review. Assess whether it is performing within your expectations and understand what drove the gains or the losses. Always strive to educate yourself in markets as well. Establish benchmarks against which to evaluate the performance of your portfolio.
Whatever the situation, avoid simply chasing yields without understanding the mechanics, risks, and overall fit with your personal situation. Don’t get into investments just because everyone else does. Understand first why they went into it. Their circumstances, objectives, and risk tolerance may be completely different from yours.
Don’t get into an investment purely based on historical performance. Understand what factors led to such good performance, since they may no longer be true under current market conditions.
As a final advice, an investment portfolio is a personal choice. If your investment portfolio is keeping you up at night and is causing anxiety, then it may not be right for you. Work with something you can be comfortable with and the rest will take care of itself.
ANGELICA “JIKEE” REYES, CFA is Senior Vice-President and Head of the Metrobank Treasury Banking Group. She has oversight of balance sheet management and trading activities of the bank. Prior to her current role, she headed the bank’s financial markets sales, brokering, structuring and risk advisory units.
This opinion article is part of Metrobank’s Financial Education campaign series.
This article was first published on BusinessWorld.