How we select the assets in our portfolio

What do you need to know before making the asset selection?

Before selecting assets, you should know the level of risk you are able and willing to carry (your risk profile) and decide the amount of money you wish to invest. You must keep in mind that your investment will be in an environment of continuous fluctuations. You must set a long enough time horizon to be able to assume those fluctuations. The money you are going to invest must be your financial surplus that you are not going to need in case of unexpected events.

You should select assets according to a defined strategy (including preferences and, if you are willing to take risks, your expectations about specific assets, sectors or geographic areas).

You should measure the overall risk of the portfolio you are building and make sure it is within the risk ranges of your risk profile.

Use portfolio optimization tools to help you better select the assets and weightings of each asset within your portfolio. It will get you the portfolio that maximizes the expected return for each level of risk, or help you minimize portfolio risk for each return objective. 

How to perform asset selection

There are many possible strategies for selecting assets for a beginner. We offer you a practical guide to this:

The first decision is the degree of diversification. Do you want a diversified portfolio, or do you want to direct your investments towards a particular sector, industry or geographic area?

There are financial products such as investment funds or ETF’s (a category of Mutual Fund that are traded on the financial markets as a stock of a company and usually have low commissions), which are a basket of assets. In this way with a single product, you get a lot of diversification. For example, by investing through an S&P 500 ETF, you are investing in the 500 largest US companies in the financial markets.

The second decision is how much time you can spend on monitoring your investments. Do you want to trade in the short term, constantly reviewing your portfolio or select assets and review your strategy from time to time?

To take advantage of the benefits of trading, you need time to track the markets. If you cannot spend time and are going to adopt a more passive investment strategy, it is safer to design a mid-long term investment strategy and analyze your investments after a certain period, unless market situations, and because of predefined strategies to stop your losses, force you to sell your assets when losses reach a certain amount. 

Many investment possibilities and strategies arise from these two decisions. For example:

If you wish to have a highly diversified portfolio at a reasonable cost and do not desire to be aware of financial markets, a good option is a well diversified basket of Mutual Funds or ETF’s geographically and by type of assets (corporate and government bonds, corporate equities, commodities…).

Do you have expectations about the future evolution of any sector/industry or about some companies in particular? … go ahead! Your strategy in this case would be to buy those particular assets and wait for the future to validate your assumptions.  This strategy has a double risk because usually this type of decisions are focused on companies or sectors with high potential growth (and therefore also high risk) and also because its concentration (not sufficiently diversified).

If you have enough time, you like adrenaline and you believe that it is possible to identify patterns of future behaviour of an asset from its historical prices, then the trading is for you. Remember how difficult it is to make money with this type of strategy. Although part of the industry may try to convince you otherwise, because of the lack of diversification, the type of products used to increase your potential gains/losses and in many cases the lack of method necessary for this type of strategies, trading is not the most advisable investment strategy for a non-professional or non-advanced investor

If you are short on time, wish to have a diversified portfolio, would like to track the trends of financial markets and include some specific assets in your portfolio, a good option is to have a basket of Mutual Funds or ETFs of different asset classes, geographic areas and management styles combined with those specific assets. Also, if you like high risks, you can add a defined percentage in Cryptocurrencies.

José Luís Álvarez – CEO HollyMontt

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