23 October 2015

Multi-asset trading: How to construct your portfolio?

Learn how to create the right asset allocation mix and what factors to consider during the process.

​​​​​​​​​​​​​​Portfolio Diversification Is Key

One of the biggest mistakes any consistent investor can make is probably to fail to diversify their portfolio. Investing in a single investment product is effectively a one-way bet, which is speculative. Investing in a diversified portfolio of assets smooths investment returns by minimizing performance volatility and enhancing returns.

 
However, all types of investments will have their own inherent risks and risk levels of asset classes vary. Therefore it is important to remember that multi-asset investing does not assure a profit or prevent losses. Instead, proper asset allocation can help to insulate an entire portfolio from the ups and downs of a single class of securities.

 

Key factors to consider in designing your Do-It-Yourself (DIY) Multi-Asset portfolio​

  • There are risks to designing any DIY multi-asset portfolio and past performance is no guide to future performance.
  • The securities and funds you invest in – whether equities, bonds, derivative products or FX – will have specific risks.
  • Mixing asset classes within a portfolio without fully understanding the likely correlation between them could make the portfolio riskier and more prone to losses.
  • Consider the inherent risk within each investment (not just each asset class) and how this correlates to the overall portfolio. For example, investing in single stocks on overseas markets will be exposed to currency movements and could negatively impact the value of your investments and any associated income through dividends.
  • It is debateable whether portfolio construction is a science – whereby portfolio modelling can be used – or an art (reflecting each investor’s own judgement).

 

DIY Multi-Asset Portfolio Creation versus Outsourcing

A multi-asset approach where a portfolio consists of equities, bonds and other assets is more diversified than an investor deciding in a reactive way to buy or selling shares based on a ‘hot’ share tip they read in a newspaper.

 
In this way, whether portfolio construction is outsourced or a Do-It-Yourself approach is taken, the two are not necessarily mutually exclusive.

 

How to create the right asset allocation mix

Things someone might consider when creating the right asset allocation mix:
  • What is my investment objective? Is income more important than capital appreciation? Is capital preservation more important than income or growth?
  • How long do I want to trade or invest for? When might I want to liquidise my holdings?
  • What is my risk appetite? Can you handle wild price fluctuations in the value of assets they hold and cope with a longer time horizon to recover from any losses? Are you inclined to pursuing aggressive trading strategies or want a more conservative proposition?
  • What percentage of the portfolio can be allocated to trading or management costs?
  • Consider the Total Expense Ratio of your planned multi-asset portfolio (the costs or running and trading within your portfolio). How does this affect your investment objective?
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The value of your investments can go down as well as up.
Losses can exceed deposits on margin products. Please ensure you understand the risks.