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Thursday, June 20, 2024

How to form an Investment Portfolio for a beginner – Complete Guide 2021

To create a well-performing investment portfolio from scratch, you do not need to graduate from Oxford and be a Doctor of Economics. You can work, for example, as an engineer and simultaneously invest in the American or Chinese stock market.

From the article you will learn what an investment portfolio is, what stages and investment instruments are, and you will understand how to create an investment portfolio for an individual. You will also find some helpful tips to help both the beginner and the advanced investor on the path to financial freedom.

Investment portfolio compilation principles

Direct purchase of shares and other assets is the final stage of the investor’s work. The main difficulties await him in the preparatory phase.

We’ll have to solve a number of issues :

  • Decide on global goals. If you are 25 years old and are going to form an investment portfolio for life in order to use money closer to retirement, there will be one style of work. If you plan to save up for a car in 2-3 years, you will have to select a different portfolio composition;
  • A novice investor needs to decide on the starting amount, the selection of instruments directly depends on this;
  • It is necessary to select the composition of the investment portfolio taking into account the diversification requirements;
  • Decide where to send dividends;
  • How often rebalancing is required – adjusting the composition of the investment portfolio.

There are several basic principles for the formation and management of an investment portfolio. Each of them is important, which is why every investor should know and adhere to them:

  1. Striving for conservatism . This principle is based on a balance between risk and return. Investments should strive to maintain this balance. There are many risks that affect financial performance. The income from it should cover all possible negative consequences.
  2. Striving for diversification . Diversification is the efficient reallocation of resources into different instruments. If you invest in only one type of investment portfolios, your income will depend on only one type of securities, which makes the situation risky. In this case, there is a possibility of losing all resources and profits.
  3. Striving for liquidity . The investor needs to maintain a high level of liquid assets. This is necessary so that the investor can carry out high-yield transactions. At any time you can exchange securities for cash, which is why you should maintain a high level of liquidity of the investment portfolio.

How much can you start

Investment portfolio management is primarily about developing investment habits ( in other words, the skill of saving money for further investment ). You don’t need to have millions to get started – the prices for different exchange instruments are quite loyal. For a start, 50-100 dollars will be enough.

Of course, a good profit requires a good investment. However, you should not enter an unfamiliar industry with too much money, as you can be left without funds and earn practically nothing. Many beginners and professional investors spend 10% of all income on investing. At the initial stage, such an amount will not bring fabulous income, but it will allow you to find the most convenient tools and analyze mistakes, after which it will be easier to increase investment volumes.

Starting capital depends on which broker you work with. You can’t buy stocks and bonds, ETF funds without an intermediary. Stock exchanges do not work directly with clients, but only through brokers. Capital requirements vary:

  • Just2Trade (FINAM EU), FxPro , FinmaxFX – you can start trading from $ 500 .
  • InteractiveBrokers, Fidelity, Merrill, Schwab – capital from $ 10,000 is required to enter trading .
  • Alpari’s investment opportunities start at $ 50 .

If the goal is short-term investments, there are companies with low entry barriers. FiNMAX allows you to work with capital from $ 250 .

What investment period to choose

Buffett once said that if an investor is not going to own a share for the next 10 years, then there is no point in buying it. In fact, in investing there are no strict restrictions on the duration of asset ownership.

The advantage of a long-term investment is that the impact on the value of the portfolio of local and global crises is smoothed over a distance. In addition, over a short distance there is a risk of falling into a “black lane” for the companies in which you invest.

  • For the period 2010-2019 starting $ 10,000 rose to $ 24,109, or 141%. The average annual growth rate was 14%. The maximum drawdown was 15.40%, the period from May to September 2011 turned out to be unsuccessful. But by March 2012, the investment portfolio had overcome the drawdown;
  • Now imagine that you invested the same amount in the same assets, but for a couple of years. The investor got into a period of stagnation, and for 2014-2015. the portfolio grew by only $ 505 or 5%. Average annual growth of about 2.5% is even less than bank interest. In addition, in the example, we did not take into account the commission when buying assets. The return on the investment portfolio is scanty, the risk does not pay off, it is easier to put money on a bank deposit.

Usually, depending on the timing, the following classification is applied:

  • Short-term investments – retention period up to 2-3 years;
  • Medium-term – up to 10 years;
  • Long-term – from 10-15 years.

Don’t confuse investing with trading. If you enter into speculative transactions daily or with a frequency of several days, this is not called investing, but active trading.

Income or growth portfolio

The formation of an investment portfolio does not necessarily mean that money will be frozen until the assets are sold. Depending on the type of portfolio, it can generate stable, regular returns.

Growth portfolio – involves investments in order to maximize the value of the portfolio. Current income (coupon payments on bonds + dividends on stocks) is not a priority. An excellent example of such an investment portfolio is the ETF Invesco QQQ Trust.

This ETF is focused on maximizing the value of assets and for the period 2010-2019. showed an increase of more than 400%. It went into a strong drawdown (19.96%) in the period from September to December 2018, but over the next 3 months the growth compensated for the losses. See the full list of growth ETFs here.

Income portfolio – in its composition, priority is given to instruments for which there is a regular income. We are talking about bonds (they give coupon income) and stocks with dividend payments. Preference is given to dividend aristocrats – companies that regularly increase their dividend payments to holders of their shares. The value of the investment portfolio is growing, but at a much slower pace compared to the growth portfolio. Take ETF Global X SuperDividend Alternatives as an example.

Investment portfolio management is standard – rebalancing once a year. A complete list of good income ETFs, where the bet is made on coupon and dividend income, can be found here .

A classic example of a profitable portfolio is that the value of shares practically does not grow, over 4 years the value of assets has grown by 6.79%. At the same time, due to dividends and coupon payments, the investor could receive several thousand dollars of income. This example shows that the goals of income and portfolio growth are different.

This is a rather crude classification. Within each group, several categories of investment portfolios can be distinguished, depending on the level of risk of the assets included in it.

How to choose assets for investment

First, let’s define the categories of assets that the investor can include in the investment portfolio.

Investment opportunities
Tool type Investor goals
Currency To protect capital from inflation and other risks. Since currencies move in a relatively narrow range, long-term investments in currencies are meaningless.
Bonds, dividend shares Formation of a profitable portfolio. Long-term investment with regular profit
Stock market Formation of a growth portfolio
The property Conservative portfolio with low returns. The main advantage is stability
Precious metals This is a “safe haven” needed to wait out shocks (stock market crisis, uncontrolled inflation)
Cryptocurrencies Risk portfolio with huge potential and high risks


There are no hard restrictions, everyone can form an online investment portfolio.

Selection recommendations :

  • If you work with stocks, pay attention to the company’s statements, debt burden, roadmap, whether there is any prospect in new markets. Combine stocks of small and large companies;
  • Be sure to include corporate and government bonds in your portfolio;
  • Cryptocurrencies – an optional element, suitable for the role of a high-risk instrument;
  • Real estate – you can either invest in buying real real estate, or work with stocks of the corresponding ETFs.

As for precious metals , everything is not limited to gold, you can invest in silver , palladium , platinum . Alternatively, you can not buy real metal, but open an OMS (anonymized metal account) in a bank.

Be sure to include highly liquid instruments in your portfolio. They are needed in case money is urgently needed in the future. They can be sold with a low spread and not lose money.

How to compare the level of risk and return

When compiling any portfolio, an investor evaluates its performance in the past and expects similar indicators in the future. It is impossible to predict the future, but if a portfolio has shown a stable result over the past 10-15 years , survived the global economic crisis, it is highly likely that it will grow in the future.

The result turned out to be quite good – over 10 years, the starting $ 10,000 turned into $ 42409 with a drawdown at the moment of 14.94%. The average growth rate of capital on compound interest is 15.54% per year. We also note the high correlation with the American stock market, unless otherwise specified, the Portfoliovisualizer automatically selects it as a benchmark.

Here we see Sharpe ratios (characterizes the risk reward, profitability volatility) and Sortino (shows the conditional income, per unit of risk), both ratios are higher than 1.0.

Also, in the analysis results, the standard deviation is important – it characterizes the maximum deviation of profitability from the average profit for the year. In our example, the average annual return was 15.54% and the standard deviation was 13.08%.

Also, the analysis results provide details on how much each of the instruments included in the investment portfolio contributed to the final result. Manual calculation will take several times more time and will give less information for analysis.

Forming an optimal investment portfolio manually is a complex process. Even after selecting the right tools, you have to randomly assign a “weight” to each of them. It is difficult to guess the optimal distribution of “weights” at random.

  • Portfoliovisualizer allows you to optimize your investment portfolio, for example, using the Sharpe ratio. There are more than a dozen optimization options, and the service is able to exclude instruments from the portfolio, and not only change their “weight”.
  • How to diversify your portfolio

    The goal of diversification is to protect investments from risks. The investor is not able to reduce them to zero, but you can protect yourself from excessive losses.

    They are engaged in diversification at the stage of asset selection. The main goal is to collect a portfolio of instruments with minimal correlation.

    Diversification is possible in several directions :

    • Industry-specific – the investment portfolio includes shares of companies operating in various fields. For example, healthcare + real estate + financial sector + IT + blockchain + energy;
    • By capitalization – to include in the investment portfolio not only giant corporations with a worldwide reputation, but also small companies with good performance;
    • By asset type. Don’t just focus on stocks. Direct some of the funds into bonds, precious metals, real estate;
    • By the level of risk;
    • By country, this helps to reduce geopolitical risks. For example, after the start of the trade war between the United States and China, the value of a share of a number of Chinese companies fell by 100 +%. If an investor had previously invested exclusively in the Chinese stock market, he would have been forced to fix losses.

How to manage an investment portfolio

Management refers to any actions that affect the composition and value of the portfolio. Here we include:

  • Rebalancing – adding and excluding individual instruments, as well as changing their “weights” in the structure;
  • Withdrawal or reinvestment of dividends;
  • Regular portfolio replenishment.

Rebalancing recommendations :

  • Follow all corporate events of the companies whose shares are included in the portfolio;
  • Rebalance the portfolio 1-2 times a year. Focus on the quarterly reports of companies, other news on their work and plans;
  • Set goals for each tool. If the stock has grown abnormally strongly, it makes sense to fix profit on it, reducing its weight to zero, and after the correction to buy the same securities. The same principle is used in trading, but in the case of an investment portfolio, such operations will have to be carried out no more than a couple of times a year. This technique is an analogue of take profit in trading;
  • If the stock market is overheated, it makes sense to “go” into bonds;
  • Use an analogue of Stop-Loss. Set the maximum allowable loss for each of the instruments included in the investment portfolio. If it is reached, sell the stock. It makes no sense to keep unprofitable assets, one of the investor’s rules is to get rid of unprofitable assets and keep profitable ones.
  • If the goal is to maximize the value of the investment portfolio, it makes sense to regularly invest in the investment portfolio. This gives a cumulative effect and in 10-20 years the total value of the portfolio will be higher compared to the option without regular investment:
    • For the period 2010-2019 ETF shares of the SPY fund gave an increase in the investment portfolio from $ 1000 to $ 35283;
  • Now consider the $ 100 monthly addition. During the same period, the portfolio grew from $ 10,000 to $ 60,162. Such a scheme does not create a large burden on the family budget, but at a distance it greatly increases the value of the portfolio. In our example, the total cost of the investment portfolio turned out to be 70.51% higher.

As for the reinvestment of dividends, it depends on the purpose for which the investor invested money:

  • In a growth portfolio, it is better to reinvest dividend income;
  • An income portfolio is initially created for recurring income. If the need for money decreases, you can reinvest part of the dividends.

Even if you have a planning horizon of 20-30 years, this does not mean that you can forget about the investment portfolio. You will have to monitor your investments, only in this case you will be able to maximize the return on investment.

For the profitability of an investment portfolio to be at a decent level, it is not enough just to create it and carefreely wait for profit. The portfolio must be regularly monitored and instruments must be adjusted. Pay attention to the following parameters and characteristics:

  1. Balance of deposits . Throughout the period of ownership of the portfolio, the value of the assets included in it will rise or fall. By managing your portfolio, you will “restore” its balance, getting rid of dependent instruments if they show poor returns.
  2. New opportunities . Continue to monitor the market. Knowing which trading instruments generate the most profits will help you increase portfolio returns and stay in control.
  3. ” Ladder of bonds “. To protect yourself from the risks caused by changes in interest rates, you can purchase bonds with different maturities. If market rates are low, long-term bonds will work for you. If rates rise, you will be able to reinvest the profits from short-term bonds into new ones issued at higher interest rates.
  4. Reinvestment of income . The main rule of a competent investor is “money must bring money”. Free profit can be reinvested if the portfolio income exceeds monthly spending. For example, you can invest in new tools you haven’t learned yet.

Long term investment strategies

All long-term investment strategies involve a relatively long ownership of a group of assets ( stocks of companies , ETF funds , bonds, and others). In fact, this strategy Buy & by Hold ( buy and hold ).

With a solid time horizon, the value of risk decreases. Practice has shown that high-risk investments at a distance of 10-15 years give, on average, lower returns than conservative instruments. We recommend reading the book by Eric Falkenstein, Finding Alpha, in which this issue is 100% investigated.

“Boring” investments give less drawdown and more often than not more profit. “

As for how to compose a long-term investment portfolio, assign a lesser role to risky assets or exclude them altogether. Also, when developing a strategy, consider:

  • Portfolio turnover. It is not worth trading too often – due to trading commissions you reduce income;
  • If investing in mutual funds, consider management fees;
  • Taxes.

The long-term investor is ruined by the neglect of portfolio costs.

Tips for Beginner Investors

  • Invest in ETFs, we will analyze their advantages a little later;
  • Prepare mentally for the fact that the money will be frozen for several years;
  • Establish an acceptable level of losses for each of the portfolio instruments, when it is reached, get rid of this asset;
  • Do not chase 100 +% profit per year, investment is a marathon, not a sprint;
  • If possible, regularly buy additional assets, this will give a noticeable effect at a distance;
  • Control risk, portfolio is based on conservative instruments.

If you invested $ 10,000 in the S&P 500 in 1995 and added $ 600 annually, then by the beginning of 2020 the portfolio would be worth $ 175,423. Such a result can be obtained by a novice investor.

The following tips will help you choose the most winning strategy that suits you, as well as understand how to properly form an investment portfolio:

  1. Emotion training . Emotion is the enemy of any investor. Do not give in to impulsive decisions, try to weigh each step, and if something went wrong and the stock fell in price, do not be discouraged, find reasons and solutions. There are no investors who have not made mistakes.
  2. Forget fabulous income . It often happens that beginners invest in short-term instruments and expect huge profits, but they do not understand the situation, follow bad advice, and end up losing money.
  3. Prepare for the risk . If you want to make money on short-term investments, be prepared for potential high losses. If you are not prepared for such risks, choose conservative papers. Be clear about what kind of income you are counting on and what risks you are ready to take.
  4. Develop your own strategy . Everyone perceives the market differently. Certain strategies and approaches can be peeped from experienced professionals, but their style should not be completely copied. Try to create something of your own, suitable for you.
  5. Think with your head . You should not follow the crowd. If everyone around you is convinced that you need to sell stocks, but you do not hold such an opinion, do not make sudden decisions. Analyze the situation, and only then act.
  6. Learn to stop in time . Make only those trades that match your trading strategy. Even the most profitable investments at first glance may not justify themselves in the future.
  7. Prepare for challenges. A beginner will not be able to make money quickly and easily in the market. Work on yourself, try new paths, keep track of your investments and constantly develop.
  8. Don’t forget to diversify . The stock market is unpredictable. If you are confident in the profitability of the instrument, this does not mean that it will happen. It is better to have several tools in stock in order not to lose money. The wider the variety of assets, the less chance that a fall in one position will hit your portfolio hard.


In the question of how to create an investment portfolio for an individual, there is nothing difficult. This does not require any economic education, or capital of millions of dollars, or the personal presence of an investor on the stock exchange. All stages, from the selection of the portfolio composition to the direct acquisition of assets, are performed remotely.

At first, there may be problems with the selection of the composition of the investment portfolio, but you can simply copy the actions of well-known investors ( the same Buffett ) and you are guaranteed not to go wrong. The main challenge is to force yourself to understand that investing is a journey for years and decades and to be patient.

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