By Howie Bick
"Howie Bick is the founder of The Analyst Handbook. The Analyst Handbook is a collection of 16 guides created to help current and aspiring Analysts advance their careers. Prior to founding The Analyst Handbook, Howie was a financial analyst."
When you’re building a portfolio, there are a variety of different factors and variables that you have to consider. Depending on the types of objectives, or the type of financial goals you have, will be important in creating your investment portfolio. The type of future outlook you have, the level of confidence you have, and the upside you believe certain assets to have will determine the amount of resources or capital you allocate to it, and the types of weight you give certain assets within your investment portfolio.
Within your portfolio, each investment or asset makes up a different number or percentage of your assets or your portfolio. Depending on the amount of investment or value an investment has, compared to the value of the total overall portfolio, is how you determine the amount of weight or allocation a certain asset or investment has. It’s also worth noting, that keeping cash on the sidelines, or not having a full allocation is also an option, if you feel the market is in a downward trajectory or going to decline. Deciding not to invest or use your capital is an investment the same way it is to use or invest your capital.
Additionally, the type of investor you are also plays a role in the way you invest your assets. Whether you’re a conservative investor by nature, an aggressive one, or somewhere in the middle. The portfolio you have, or the one you construct, is often created with a certain goal or objective in mind. This means, the capital you are choosing to invest or allocate to the portfolio, usually has an objective or a goal in mind. Whether if it’s saving for a new home, a certain investment, or a certain upcoming expense, the type of objective or agenda you have for yourself or your life is going to be a factor in the creation of your portfolio.
A lot of it also depends on where you are in life. Are you younger or older, do you have a family, are you trying to save for your kids, the life factors around you also play a role when you’re creating or shaping your portfolio. There are lots of things to consider when it comes to creating a portfolio, and there are many factors you have to consider when deciding which assets to invest in, and how much to invest into them.
The weight you give to a certain investment or asset, shows the level of confidence you have for it, the type of risk you’re willing to open yourself up to from it, and the effect it’s going to have on your overall portfolio. Why the weights are so important to consider, is because it has a strong effect on the way your portfolio moves, whether up or down. The more allocation or weight you give an asset, the more the portfolio is going to be affected or move as it moves.
A thing to keep in mind when it comes to allocations, is the direction you believe the market is going into, and whether a certain industry or company is going to perform well in the future. If you like a company or their business model and feel like they are only going to grow their revenue, their market share, and their income, then consider those when you’re making the different allocations within your portfolio. Depending on the asset classes you like the best, the type of companies you’re most bullish, and the way you build your portfolio, are important factors in determining the weights of each asset and investment.
Another important thing to consider is rebalancing your portfolio or readjusting the weights within your portfolio. When one asset performs really well, or a certain investment performs great, often times the allocation or the weight it has tends to outweigh what you originally thought or believed it would be. This is a great problem to have, as it means your investment has performed better than you expected it to. If this happens, then you have a decision to make. Whether to keep the money invested, and the investment the way it is, or readjust the allocation or the weight. Ultimately, it’s a decision that’s up to you, and for you to decide. To determine whether you’d like to keep the capital or allocation invested or look to reallocate the capital. Either way, it’s an awesome place to be in, and a great problem to have. As it means your investment or portfolio has done well, and you’re in a better position than where you once were.
Creating a portfolio comes with lots of things to consider. The one we tried to highlight in this article, are the allocations you make, and the weights you given to certain investments or assets. The allocations you make play an important role in the way your portfolio moves, the portfolios performance, and the risk your portfolio is exposed to. The performance and the allocations within your portfolio are closely tied, as they are two of the major contributing factors to the fluctuations and movements within your portfolio. The allocations and weights you assign to certain investments indicate the confidence level, or the belief you have in them.
Depending on the way the market is headed, or the future outlook of a company, it’s smart to keep in mind how much of your capital is invested into them, and what you feel comfortable with. As you build your portfolio, learn and understand the market, and are able to evaluate and analyze investments, you’re able to get a glimpse into how to become a financial analyst. By building a portfolio, and gaining that experience, you’re able to get some insight into what some financial analysts do, and the type of tasks they are used to.
We hope you were able to get a bit more insight and information on the importance of the various allocations and weights of your assets within your portfolio. Best of luck, and we wish you nothing but success.