The process of forming a portfolio is often called asset allocation. It involves determining how much money to invest in each specific instrument in your portfolio.
First, you need to understand what type of investor you are - active or passive. An active investor independently forms their portfolio through a broker, constantly monitors it, and makes all decisions directly. This requires a lot of time, effort, knowledge, and considerable nerve. The market constantly fluctuates, and the behavior of a chosen stock is unpredictable. If you are ready for this, you can dedicate yourself to investment activities, potentially becoming like a professional manager.
Passive investors, on the other hand, entrust their investments to professional managers and monitor the quality of their work. Choosing the right financial intermediary to help implement your planned investment strategy is crucial. However, even passive investors need to understand the basic principles of portfolio formation so that the process isn’t a "black box" to them.
The main principle in forming your investment portfolio is diversification. The root of this word comes from the Latin diversus, meaning different, turned in another direction, lying in different directions, and even opposite. Only two meanings of this Latin word are not allowed: "disparate" and "quarreling."
Concentrating all your capital in one security is unwise, as the dependency becomes 100%. Distributing assets among several different financial instruments allows you to offset the losses of some with the gains of others. A stock portfolio can be diversified by sectors, geographic regions, and other characteristics that distinguish companies from each other.
If you invest in mutual funds, you automatically achieve diversification, as any mutual fund holds a diversified portfolio.
Choosing the right time to enter the market is equally important. Timing means choosing the right moments to enter and exit the market. Missing the right moment means missing potential profit. It might seem easy—just buy at the market bottom and sell at the peak—but predicting these points is extremely difficult. The timing strategy is tempting but complex and risky. Ideally, you would invest everything at once and exit the market with huge profits at the right moment, but this is unlikely for the average investor. Therefore, seasoned "financial martial arts" masters recommend investing regularly and in small portions. This reduces the risk of investing at the market peak before a fall. If the market goes up, you can gradually invest the remaining money. If the market goes down, you can stop investing.
The key for an investor is to have a long-term investment vision. It should be thoughtful and balanced, designed for the long term. Constantly changing your investment strategy can lead to significant losses due to commissions to brokers, management companies, or other financial intermediaries. Investments bring income in the long run, but in the short term, they can fluctuate significantly. Therefore, do not make important investment decisions based on emotions, unverified news, rumors, or superficial market evaluations.
