Introduction

Portfolio Management refers to managing your investment assets across all financial instruments such as stocks, bonds, money market instruments, real estates, etc. In this article we will be focusing only on portfolio management of stocks.

The idea of having a portfolio revolves around the philosophy of “Don’t Put All your Eggs in One Basket”. As our resources (money in this case) are limited, we will have to design our own portfolio so that our resource are allocated in a way to spread our risk.

Even in stocks alone, there are various school of thoughts, strategies and methods that governs our decisions on which stocks to invest in, whereby each has a different level of risk associated to it. To create our own risk-balanced portfolio, we must create certain rule of allocation to each category which are customised to our own believes, philosophy and risk appetite to generate the most return within our acceptable risk level.

Many people associate portfolio managements to complicated calculations or requires professional fund managers to do it, but in fact one should keep it as simple as possible to ease decision making and reduce effort required to manage it. Some of the ideas on how to allocate our resource to create a well balanced portfolio are illustrated below for your consideration.

Long Term Vs Short Term

Buying stocks for long term generally refer to the term “investing” whereby we foresee the stock price to rise due to growth of the value of fundamentally sound companies over a long period of time, generally in a time horizon of 1 to 10 years or more.

In contrast, buying a share for short term is normally called as “trading” whereby we foresee the stock price to go up or down and we earn the difference in price through buying and selling within a short time frame, usually within days or months. To have a well balanced portfolio, we must allocate our resources in both “investing” and “trading”, as they complement each other in providing you with different kinds of rewards as well as risks.

For example, long term stocks that do well generally will provide you consistent dividends which are great passive income with lower risk, whereas short term stocks will provide you with capital gain through buy low sell high, but it comes along with relatively higher risk.

However, trading using a proven system with an edge that is used by professionals worldwide is able to provide you with secondary income source regularly, whereas dividend paying stocks only pays dividends once/twice/quarterly a year. Having both in your portfolio will balance your risks and rewards.

Large Capital vs Small Capital Stocks

Buying large capital stocks refers to buying large companies whereby they are relatively stable and have much lower risk of going bust suddenly. Hence, they are relatively lower in risk but has less room for growth generally as they already achieve certain level of market saturation which makes the company difficult to expand/growth. Less growth equates to less potential increase in net earnings and share price.

On the other hand, small capital stocks will have much more potential to grow as most of them are new startup companies or companies with a unique market that has minimum competition. Therefore, more growth equates to more potential increase in net earnings and share price.

However, do note that small capital stocks are relatively riskier with more volatile share price fluctuations as these companies do not have much longer track records of large capital companies and may go bust overnight. Method of allocation between large and small capital stocks will greatly depend on individual’s risk appetite and preference on risks versus rewards.

Stocks in Different Industries

It is advisable to spread your positions in different industries as some industries are cyclical while some tends to be flat and constant.

Cyclical industries are usually commodities, oil & gas, shipping etc. These industries have their up and down years subjected to market forces and economic conditions which are rather challenging to foresee. Flat and constant industries are usually associated to life necessities such as FMCG (Fast Moving Consumer Goods), food manufacturers, telecommunication, etc.

It is very difficult to accurately predict when will a particular industry would turn bad, therefore it is a good practice to spread your risk by taking positions in different industries, generally 3 or more. Great example is that many industry analysts were predicting very bullish oil price before it crashes spectacularly last year, bringing the oil & gas industry into the current turmoil which caught many investors and even professional fund managers to lose money in oil & gas related stocks.

Portfolio Example

Below is an example of a medium risk individual stock portfolio. Do note that the percentage allocation may not need to be constant and can be fine tune according to the latest economic conditions or adjusted according to your portfolio performance.

Conclusion

The idea of portfolio management is to spread your risk by taking position in stocks with different characteristics. Beginners can start with experimenting with a ratio based on your risk preference and fine tune it as you gain experience and monitor your stock performance over time. It is also important to always set aside extra resource which are not used for trading or investing so that you can take position when an unplanned opportunity occurs.

While there is this saying of “No Risk No Reward”, it is always prudent to practice risk management to balance your risks versus rewards and be able to stay in trading/investing over the long term for your financial goals. Taking lots of risks may make you lots of money in the short term that will likely boost your ego and make you think that risk management is not important. This approach & mindset is equivalent to gambling in casinos and has been proven to cost you to lose all your short terms profits plus your capital if you ignore risk managements! Remember this – “Trading/investing is a MARATHON, not a SPRINT!” It is not good enough to win a few battles but losing the overall war (i.e. your key financial goals such as financial freedom or early retirement)!

Watch out for next article in this series of education articles brought to you by iVSAChart, “Article 13 – Trading Psychology” under Series B: Preparation Before Trading or Investing (what professionals worldwide are practicing).

Interested to learn more?

- Website https://www.ivsachart.com/events.php

- Email: sales@ivsachart.com

- WhatsApp: +6011 2125 8389/ +6018 286 9809

- Follow & Like us on Facebook: https://www.facebook.com/priceandvolumeinklse/

This article only serves as reference information and does not constitute a buy or sell call. Conduct your own research and assessment before deciding to buy or sell any stock. If you decide to buy or sell any stock, you are responsible for your own decision and associated risks.