Asset Allocation: Your Roadmap to a Powerful Portfolio

Asset Allocation: Your Roadmap to a Powerful Portfolio

33 Tips, Strategies, and Powerful Ways to Create a Money-making Portfolio

We all know that asset allocation and diversification are two of the most important practices in investing. And we also know that there are many ways to accomplish those things.

And we’re not talking about the vague idea of asset allocation and diversification. Once you already took the plunge, you would realize that what you know doesn’t really suffice.

So what do we do?

We got not only 5, not only 10, but 33 tips, strategies and ways to help you create the best portfolio—your very own money-making machine.

But first…

asset allocation infographic

Asset Allocation Basics

Throwing the right kinds of stocks, bonds, indexes, and securities in the mix can be really helpful. And by “helpful” we mean money-making.

But you don’t only have to throw anything and everything you can get your hands on. Your choices should be well-thought and analyzed.

When you are picking or selecting assets, you should remember the following:

1.   It should be something you know.

This is an old lesson but it’s still very effective. Never invest in something that you don’t understand. It’s much like writing or singing: you cannot write or sing a story or song you don’t know. But what if you lack the practical experience and the knowledge? Then…

2.   Study, study, study!

If you don’t know anything about investing and assets, then hit the books. Go online and open educational investing sites (like this one). Indulge. Enjoy the free video tutorials on Youtube. Research. Read news. Study investing like your life depended on it.

3.   Know the relationships between your assets.

For instance, some stocks rise as others also rise, which means they have high correlations. Meanwhile, there are those that fall down when others rise. That means they’re inversely correlated. You know the gist. If you understand the correlations between your assets, you can place better, strategic trades.

Related: Several Types of Investment Risks

4.   Determine your goals.

Well, this is a generic advice—but it works! Knowing your goals, whether short or long-term, gives you direction. Do you want to grow your capital in, say, two years? Do you plan to switch strategies every month? How are you going to do all those things? These are just some of the questions you should ask yourself when trying to determine your goals.

Read Investment Plan: Why Should You Have One?

5.   Know which strategy to use for each asset.

Once you know how your assets are correlated and what your goals are, you have to know what strategy’s the perfect one for an asset. Some strategies work well with certain assets, and some are totally futile. This also entails more time for research and study.

6.   Ask yourself: are you choosing fundamentally or technically?

If you’re still confused, fundamental analysis involves the study of the economy, economic indicators, and other such stuff that affect an asset’s value. Meanwhile, technical analysis involves the use of charts, indicators, and similar things. When you choose assets, gauge first how you view them. Are you looking through the lenses of a technical trader or fundamental investor?

7.   Are you planning to hold them long or are you going to let them go shortly?

Here’s another question you should ask yourself. You don’t really have to be only one kind of market participant. You can be a long-term investor just like Warren Buffett. Or, if you prefer, you can be a day trader. Of course, this decision involves close consideration of how much you’re willing to be committed.

8.   Do not depend too much on past performance.

This is also a really good way to track your asset’s value and progress. If you know how good it has performed in the past, you can get a glimpse of how it can perform in the future. However, you shouldn’t make that an excuse to be too lax and confident on your strategy. Even if a stock has performed really well in the past, you cannot be entirely sure that it will continue its momentum. Overall, the best way is to be on top of every trade you make.

9.   Fixed-income securities are a must.

Bonds and other kinds of fixed-income are really good additions to your portfolio. That is, if you’re willing to wait until the dividend payments reach a level where you can say you’re earning real profits. But this shouldn’t be long. Most companies that offer dividends do so because of their steady business and cash flow. Fixed-income securities also somewhat offset the risk and volatility caused by your more aggressive stocks and securities.

Related: Dividend Reinvestment Plan for Starters

10. Choose a straightforward business model.

Going back to the first advice, you must invest in something you understand. Now, you don’t have to be extremely well versed in different businesses just to know what you’re up against. It’s also smart to invest in easy-to-understand business models to lessen the burden of studying.

a group of investors dicussing

What type of investor are you? (And more tips!)

Now, those are just the appetizers. Once you have considered and done those things, the next step is to have a clear idea of where you’re heading.

Choosing where to hit the spot can be a little bit tricky. It also varies from investor to investor. Therefore, you must first know what kind of investor you are.

Autopilot

If you like convenience, you’re probably an autopilot investor.

This means that you don’t have to check the market every now and then, since your investments are automatically deducted from your salary.

However, if you’re this type, it’s easy to miss out on all the fun. You also wouldn’t know how your portfolio is doing. In that case, there will times when you won’t know which opportunities are lost in the cacophony. You’ll have no idea how much you’re gaining or losing—you just know you have some sort of investments.

The Snoop

We don’t mean any negative thing about the snoop. It’s just what it is—an investor who’s constantly reading and researching about market movements.

If you’re the snoop kind of investor, you are basically wired for updates. You have your charts and market news subscription. You know when the market is falling, rising, or continuing a trend.

Being a snoop is stressful. You’ll have to suffer day-to-day stress for every market downfall or uncertainty.

But that’s not say that it’s totally bad. You’re just doing a great job.

Active Investor

When you’re an active investor, you don’t only follow the market, you also devour the date you get.

You constantly find connections. You try to find ways to predict the next move. Your main goal is to know the next market move even before the market knows it. You like to get ahead of other investors.

Also, an active investor doesn’t have any problems in terms of incurring risks of his/her high risk tolerance. The mindset is to get high rewards for the equally high risks she or she experiences. Usually, he or she will hold a really good stock to hold. This person’s down for the long haul.

The Moral Investor

If you’re a moral investor, you pick according to your, well, morals.

This sounds a little bit cutesy, but there are investors who refuse to invest in companies or stocks with a bad reputation. For instance, he or she will refuse to invest in companies which he or she thinks are ruining the environment.  That’s just because he or she cares for the environment.

This is not bad. However, you must know that if you’ll do it like that, you’ll probably end up with limited choices.

Portfolio-conscious Investor

This one likes to adjust and alter his or her portfolio for every change he or she notices in the market.

A portfolio-conscious investor adds and removes stocks and assets every now and then to suit the times. You can get a lot of benefits if you’re this type. You are up-to-date, adaptive, and flexible. Of course, this requires a lot of work and study, but it will pay off.

Now, if you already know what kind of investor you are, try to follow the following tips:

11. Create a Simple and Cheap Portfolio.

If you’re just starting out, it’s always better to be cautious. Do not dive into something you’re not totally sure about (see tip number 1).

12. Compare your choices.

If you think you have a full table of choices, do your homework and see where your best option is. Some assets give you ease, some provide good chances of earning big quickly, and some are meant for long waits. Also, you might be missing something. Viewing a bigger picture is always better than looking at assets in isolation.

13. Aim for the big fish.

We have said to create a simple and cheap portfolio. We won’t take that back. But investing requires you to always move one notch higher. That means after you’ve fortified your portfolio, you should start adding some big fish into it. Target those that have very good reputations and are already very well-established.

14. Keep an eye on risks vs. rewards.

You should know how much you are risking and how much you are standing to gain. Most of the time, the bigger the reward, the higher the risk you have to withstand. However, there are investments that can give you something more for less. There are also high-risk low-reward investments.

15. Know your risk tolerance.

This is one of the most important things you should know about your trading psychology. How much risk can you endure without losing sleep or having anxiety attacks? You should know that some investors who stand to lose all their wealth experience these things when they take on more risks that they can manage.

16. Manage your risks.

Knowing your risk tolerance entails good risk management. And risk management is a discipline many traders and investors find hard to learn. You’re doing yourself a big favor if you know proper risk management. It protects you from unnecessary risk, plus it tells you how much wiggle room you have.

17. Follow your risk management strategy.

Your risk management will be useless if you’re going to deviate from it. It also requires much discipline to stay on track. Sometimes, news and sudden turnarounds in the market compel you to do something other than what you planned. And most of the time, it leads to disastrous results.

18. See if you’re in the right market.

Some techniques work for a certain type of market, but typically do not work for another. For instance, going short in the currency market is quite common. Most of the time, it’s effective, especially in a bear market. However, if you try to do that in the stock market, you’re wishing a company to go down. That company will of course try its best to stay on top. And most probably it will succeed, albeit short-term. That means you’ll be on the losing side.

See also Bull Market: Clever things to do before it Ends

19. Dig the history of that market. We have said that history doesn’t always repeat itself.

That doesn’t mean you shouldn’t look back and dig into it. Investors who use technical analysis claim that the market has done everything before, and it will just keep on doing them all over again. Though that principle is arguable, it won’t hurt to study past movements.

20. Learn more about economics.

If you’re using fundamental analysis, you should definitely have a crash course on economics and other stuff that affect the world’s economy. Successful investors like Warren Buffett learn all that they can about a stock’s inherent value. And getting that value means understanding how it stands on the overall economic condition of a country.

Asset Allocation

Fundamental vs. Technical

Since we have mentioned fundamental and technical analyses, why don’t we dig into it?

What’s Fundamental Analysis?

As we have mentioned, fundamental analysis enables you to determine an asset’s intrinsic value. You do that by examining economic factors, as well as financial factors. This includes the study of the overall economy and industrial conditions.

Your goal as a fundamental analyst is to know if an asset is undervalued or overvalued. Once you do so, you can tailor your investment strategy for that stock. But basically, you still follow the “buy low, sell high” principle.

Ask yourself the following questions when stock-picking with the fundamental analyst’s hat on:

21. How’s the company’s revenue?

Since your goal is to find a stock that can go up, up, and up in value, the very first indicator you will look at is its revenue. If it’s growing, check if it’s set to continue so in the future. If it’s not, figure out why. Then, find some indicators that ensure its potential future growth.

22. Is the company making money?

If a company is actually making money, you can try to study what factors affect its earnings. See if it can be sustained and how long.

23. Can the company overpower its rivals?

This can be tricky to find out. You’re not only measuring the ability of your chosen stock, you’re also gauging other companies. This means more work for you, and it’s a lengthy process.

24. Can it pay dues?

If the company can pay its debts, you can’t exactly say that it’s going to perform well. However, you can build confidence on its capacity to survive its market. Also, check why it has debts in the first place

25. Will the stock be a good investment?

Of course, you will only find this out once you finished all the analysis you have to do.

What’s Technical Analysis?

If fundamental analysis focuses on the present conditions, technical analysis tries to learn from the past to predict the future. If you’re a fundamental analyst, you try to study the different statistics from trading activities.

Among the things you have to study are the price movement and volume.

Your main goal is to forecast the future movement of an asset based on the charts and tools that are available to you.

Here are the tips for you to perform technical analysis while allocating your assets:

26. Learn to use charts.

Technical analysis requires you learn to use different charts and price maps. This is your primary tool to read the data from the market more thoroughly. The data you must take must have a long-term scope, so that you can see the bigger picture of the price or market movement.

27. Learn to read a trend.

Once you have charted and mapped all the data, you have to sharpen your senses and learn where to look for a trend. When spotting a trend, it’s better to use more than one kind of indicator. Some indicators are better at reading trends, while some are better when determining the highs and lows of the market.

28. Support and resistance levels.

After you spot a trend, the next move is to ride with it. Then, search for the support and resistance levels. When we talk about the support level, it’s normally the price’s previous low, while the resistance is its previous high.

29. Be alert for market retracement/corrections.

Once you have got the feel of a trend, you must also be wary of retracement signals. These indicate a possible correction in the price of the asset if it’s going up. You can use percentages to measure the amount of retracement for a trend.

30. Lines, lines, lines!!!

If you want to visualize how the asset price moves, you have to draw a line. This can make the analysis and the observation of market prices much, much easier.

31. Use moving averages and follow them.

Moving averages are one of the most useful technical analysis tools for traders and investors. Use these indicators to spot and buy and sell signals. You can also know by looking at them if the trend is still ongoing. You can try to use two kinds of moving averages charts to better calculate the movement.

32. Use oscillators.

As we have mentioned, different indicators give different kinds of signals. If moving averages can confirm trends, oscillator can tell you if the market is oversold or overbought.

33. Keep doing it.

There’s really nothing that beats continuous practice. This also goes for investing in general. The more you do it, the more that you’ll understand the market.

Conclusion

We could go on and on and list down all the possible strategies you can use. However, all you really have to know is that you should do your best. Invest with a mind and view to earn. Learn all the tricks and hacks you can to improve your strategies on asset allocation and portfolio diversification.

 

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