Portfolio investing is an investment strategy that reduces risk and pursues returns by diversifying funds across different asset classes, industries, or financial instruments. Its core concept is "not putting all your eggs in one basket." In a narrow sense, it primarily refers to the Markowitz portfolio theory, while in a broader sense, it encompasses theoretical frameworks such as the capital asset pricing model.
This strategy must be implemented to align with the investor's risk appetite and investment objectives. Common assets include stocks, bonds, real estate, and gold, and dynamic management is used to adjust the portfolio allocation. Regulatory requirements limit a single asset class to no more than 25% of a single trust plan. A recommended portfolio size of 5-10 stocks balances diversification and management efficiency.
Traditional theory is based on diversification, and the efficient market hypothesis, which struggles to explain market anomalies, has been supplemented by behavioral finance. In practice, systematic risk is managed through tools such as stock index futures and hedging, and target allocations are maintained through regular rebalancing strategies.
Having a clear understanding of yourself can ensure that you avoid deviations and setbacks in your investment plan, but to determine the specific investment portfolio you need, you first need to understand your own financial situation.
Compiling a balance sheet can be very helpful in your investment planning. The following are recommended categories:
(1) Interest-paying instruments;
(2) Equity instruments;
(3) Lifestyle assets;
(4) Liabilities; Your most important decision is to determine the relative weighting of interest-paying instruments and equity instruments, which roughly determines the return/volatility characteristics of the portfolio.
When sorting out your assets and liabilities, be careful not to confuse asset classes and look at them from the broadest possible perspective. For example, you may think that a vacation home should not be classified as a lifestyle asset, but it generally consumes rather than creates wealth unless it generates rental income that exceeds the holding cost, thereby generating positive cash flow. Be firm in your investment philosophy. Different investment philosophies determine different ways of managing funds. For those of you who invest in a diversified portfolio, you believe that market analysis techniques cannot add value and that "beating the market" is an unrealistic investment goal. Therefore, you must accept the fact that the potential long-term growth path of the portfolio is the best possible outcome. As you get closer to the worldview represented by the fourth quadrant, technical factors become less and less important, while decision-making factors become increasingly important. The latter is related to the choice of asset classes and the relative weighting of funds among them. Once you have a firm investment philosophy, you've established a theoretical basis for your long-term portfolio investment plan, and all your actions become meaningful.
Clarify Your Needs, Constraints, and Investment Horizon
Only by clarifying your needs and constraints can you ensure the implementation of your long-term portfolio investment plan. For example, you must consider the need for portfolio liquidity. If you might need funds to meet future expenses, it's best not to invest in illiquid investments, such as real estate.
You also need to clarify your investment horizon. The two major risks facing a portfolio are inflation and return volatility. Over longer investment horizons, inflation risk is higher than market volatility risk. Therefore, portfolios with longer investment horizons should allocate more assets to equity instruments to ensure the long-term capital growth needed to increase purchasing power. Over shorter investment horizons, market volatility poses a higher risk than inflation. Therefore, portfolios with shorter investment horizons should focus more on interest-paying instruments, which offer more stable principal values.
Many people tend to underestimate their investment horizon, resulting in an underweighting of equity investments and overexposure to inflation. This is partly because most people tend to define their investment horizon based on their expected retirement date. This has led people to mistakenly believe that equity investments are only suitable for increasing net worth before retirement, at which point they should be sold and the proceeds invested in interest-paying investments. The problem with this conventional wisdom is that it ignores the fact that inflation will continue to be a significant threat after retirement.