We often emphasize the importance of building an investment portfolio. Why is it so important?
Simply put, an investment portfolio is a collection of different financial instruments, leveraging their distinct characteristics. The goal is to reduce risk, increase return stability, and foster a positive investment mindset.
For example, while stocks offer the highest long-term returns, investing solely in a single stock or in just one type of instrument can lead to significant volatility. When unrealized losses are excessive, negative emotions can easily overwhelm us and lead to irrational investment decisions.
- Preparation
First, we need to understand our risk appetite—aggressive, balanced, or conservative—and then select appropriate investments based on this understanding.
- Construction
This step involves determining the balance of stocks, bonds, and money market funds based on our risk appetite and the current economic cycle.
Generally speaking, during a recession, the asset ratio is bonds > cash > stocks; during a recovery, stocks > bonds > cash; during an overheated period, stocks > cash > bonds; and during a period of stagflation, cash > bonds > stocks.
- Regular Review and Rebalancing
For example, over the course of a year, if the assets in your portfolio fluctuate, the initial balance will inevitably be disrupted. At this point, you'll need to manually adjust your portfolio based on your current situation. If your stock assets increase, sell them appropriately; if they decrease, buy them back to maintain the portfolio's initial returns and volatility.
Of course, rebalancing is also necessary if your personal risk preferences or the economic cycle changes.