When planning to invest money in order to save it and make a profit, it is important to consider several investment tools. Their combination is called an “investment portfolio”. It is designed not only to preserve and increase funds, but also to minimize the risk of their loss, to minimize the likelihood of investor losses through a competent balance of investments.
But is it possible to think through and calculate this balance on your own, without economic education and investment experience? Which tools should a beginner use and which ones should they avoid? And how to assemble an investment portfolio that will become a reliable investment? Real estate investment expert, qualified investor Andrei Mozol these questions to the FAN .
Photo from the personal archive of Andrey Mozol /
What is an investment portfolio
An investment portfolio is a collection of financial investments and assets that are aimed at saving or making a profit. The essence of maintaining an investment portfolio is to select those tools with which the investor can achieve his goals.
These could be:
- preserving funds in the long term - for example, “carrying them over” to retirement or the education of children and grandchildren;
- protection of capital from inflation;
- accumulation of funds - for example, for the purpose of purchasing real estate;
- obtaining profit and maximum income in the short term.
Taking into account these goals, the components of the investment portfolio and their combination are determined. Since different instruments have different returns and risks, their combination will be different for two investors: one of whom seeks to preserve capital, and the other wants to increase it in the short term.
“There is an opinion that the basis of a portfolio is always stocks and bonds,” notes real estate investment expert Andrei Mozol. - However, a portfolio is a collection of more than just stock investments. It also includes over-the-counter elements, including goods, cash and cash equivalents, as well as real estate, works of art, royalties, patents and other components.”
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Sharpe ratio
This measure is very similar to the Treynor ratio, but here the risk is the standard deviation of the portfolio rather than the systematic risk represented by beta.
The formula for calculating the Sharpe ratio is:
, Where
PR=portfolio return RFR=risk-free interest rate SD=standard deviation Using the example from the previous section, the S&P 500 index has a standard deviation of 18% over a ten-year period. Then for portfolio managers the Sharpe ratio will look like this:
| Manager | Annual return | Portfolio Standard Deviation |
| X | 14% | 0,11 |
| Y | 17% | 0,20 |
| Z | 19% | 0,27 |
| S(market) | (0.10-0.05)/0.18 | 0,278 |
| S(managerX | (0.14-0.05)/0.11 | 0,818 |
| S(manager Y) | (0.17-0.05)/0.20 | 0,600 |
| S(manager Z) | (0.19-0.05)/0.27 | 0,519 |
As in the previous case, it turns out that the best portfolio is not necessarily the one that brings in the most money. On the contrary, the best result is profitability combined with acceptable risk.
Unlike the Treynor ratio, the Sharpe ratio measures performance taking into account diversification. Thus, this measure is better suited for assessing well-diversified investment portfolios.
Return on investment portfolio
The ratio of assets in an investor's portfolio can be any. The main thing is that they generate income within the time frame expected by the investor.
Another significant factor is balancing and minimizing risks. Since there are no absolutely reliable investment instruments, the portfolio should be diversified, that is, “place” financial investments and assets that are not related to each other. Then the stability of some elements of the portfolio will stabilize the fluctuations of others, and the likelihood of losing invested funds will be lower.
Depending on the components, experts distinguish several types of investment portfolios.
Growth Portfolio
It includes shares of young or rapidly growing companies. Such combinations of investments can provide quick, high returns in the short term. But at the same time, they are the most risky, since the rapid growth of a company can result in a decline in its position in the market and the loss of every ruble invested in its shares.
Portfolio of undervalued companies
Investing in securities of companies that have stable positions, but have not yet been properly valued. Therefore, their shares can be purchased at a favorable price with the possibility of earning money in the medium term.
Such investments can be justified only if the investor can independently assess the real profitability of the company and its development prospects, taking into account industry trends. If such an analysis is impossible or one has to rely on the opinion of “advisers,” the risk of the investment portfolio turns out to be high.
Minimum risk portfolio
It is formed from the most reliable financial instruments, for example, bank deposits and investments in government bonds. Risk minimization here is achieved by state guarantees: if something happens to the bank, the state will compensate the amount of the deposit or part of it in the amount determined by law. The bonds are also backed by government guarantees, so the risk of losing money invested in them is low.
At the same time, you should not expect high income from such a portfolio. It allows you to save funds, protecting them from inflation, rather than to increase them.
Balanced all-season portfolio
When forming, they use both reliable low-risk instruments, for example, government bonds, and high-yield risky ones: shares or options. Balancing allows you to reduce the likelihood of financial losses, ensuring portfolio profitability, regardless of market fluctuations.
“There are many options for combinations of portfolio instruments,” explains real estate investment expert Andrei Mozol. “But given that most ordinary people do not have sufficient financial literacy and do not use the services of certified financial advisors, the problem of diversification, that is, the distribution of investments, remains the main problem for investors.”
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Correlation properties.
1. Correlation is a number between -1 and +1 for two random variables, \(X\) and \(Y\):
\( -1 \leq \rho(X,Y) \leq + 1 \)
2. A correlation of 0 (uncorrelated variables) indicates that there is no linear (direct) relationship between the variables.
If the correlation is 0, \(R_1 = a + bR_2\) + error, with \(b = 0\).
- An increasing positive correlation indicates an increasingly stronger positive linear relationship (up to 1, indicating a perfect linear relationship).
- An increasing negative correlation indicates an increasingly stronger negative (inverse) linear relationship (up to -1, indicating a perfect inverse linear relationship).
- If the correlation is positive, \(R_1 = a + bR_2\) + error, for b > 0. If the correlation is negative, b
Risks when forming an investment portfolio
Taking into account the investment instruments used, portfolios are divided into three risk groups.
- Low risk . They are also called conservative. They are a combination of investments in government bonds, real estate, deposits of large banks and precious metals. This investment option can be a good choice for beginners. But when calculating an investment portfolio, you should make sure that its profitability covers inflation. Otherwise, such an investment makes no sense.
- Medium risk . An example of an investment portfolio in this group is a combination of stocks, bonds and index funds in a 30/30/40 ratio. In this case, you should choose dividend shares and coupon bonds of large, stable companies, the fluctuations in the value of which on the market are insignificant, and dividends and coupons become an additional source of income for the investor.
- High risk . They are made up of options, high-yield bonds, and shares in investment funds. Maintaining an investment portfolio of this profile requires the investor to have strong financial knowledge, the ability to understand the market situation and make forecasts. It is also necessary to be able to regularly devote time to accounting for an investment portfolio, which is formed for a short period of time in order to quickly earn money. Otherwise, the risk of losing the invested funds is much higher than the probability of earning.
Fact . Investors who do not have the knowledge and experience of investing may benefit from the assistance of a financial advisor or investment advisor. According to Russian legislation, the adviser is obliged to draw up an investment profile of the client and, based on it, provide investment recommendations.
“There are a lot of scammers in this area,” notes real estate investment expert Andrei Mozol. - They can actively advise investing money in high-yield stocks or funds, while, as a rule, they earn on commissions when buying and selling shares. It is not difficult to distinguish a scammer from a certified investment advisor. Such “consultants” are not involved in compiling a client’s “risk profile” and work without certificates. If such a person advises you to invest money somewhere, ignore him.”
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Determination of independence for random variables.
Two random variables \(X\) and \(Y\) are independent if and only if:
\( P(X,Y) = P(X)P(Y) \)
For example, given independence:
\(P(3,2) = P(3)P(2)\)
We multiply the individual probabilities to get the joint probabilities. Independence is a stronger property than uncorrelated because correlation concerns only linear relationships.
The following rule applies to independent random variables and therefore also to uncorrelated random variables.
How to create an investment portfolio
To avoid making mistakes when choosing financial instruments, follow the expert’s recommendations.
Define your goal
Answer yourself the question, what financial result do you plan to get? Taking into account your personal goal, use those financial instruments that can provide it. If your goal is to preserve your accumulated funds, investments in precious metals or bank deposits or government bonds are suitable. If you multiply, use investments in stocks, bonds of large companies or index funds.
It is important to remember that some tools can generate income faster, while others take longer. The time during which funds work in a particular project is called the investment horizon.
“For example, an IPO (the first offering of shares on the market) has a freezing period of 90 to 270 days,” Andrey Mozol clarifies, “and before its end you will not be able to sell this option. Those wishing to buy a new building at the foundation pit stage should take into account that with a 90% probability the apartment will be sold no earlier than 3–5 months before the house is put into operation. And the construction of a residential complex can take months and even years. When investing in real estate, you can receive passive income from renting it out, but such investments pay off within 5–10 years.”
Work with what you understand
It is important to compose an investment portfolio for beginners from tools that you know at least at an elementary level. At the same time, you should not succumb to the persuasion of a broker or consultant who advises you to try a new “highly profitable” instrument, the essence of which you do not know. There is a high probability that this experiment will fail.
“If you don’t know what a cryptocurrency or an IPO is, but have simply heard about such investment options, study them first, and only then decide to use them,” the expert advises.
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Invest money you are willing to lose
No financial instrument provides an absolute guarantee of saving funds. Everything invested can be lost down to the last penny. The longer the investment period, the higher this probability.
“Only a professional can assess the risk of losing an investment,” notes Andrey Mozol. - Therefore, invest only part of your savings and earnings. Always leave savings that will be enough for 3 months of normal life. And never invest with borrowed funds."
Consider financial analysis data
As a general rule, it is worth investing only in those areas, industries and companies in relation to which an analysis of financial performance has been carried out with a positive assessment. So Warren Buffett , one of the world's largest and most famous investors, notes that it is better to buy a good company at a fair price than an ordinary one at a great one.
Don't forget about the security factor
The state guarantees the protection of individual investment accounts, brokerage accounts, and bank deposits. One of the forms of guarantees from the state is the right of ownership of an apartment or land plot. If there are guarantees for tangible and intangible assets, the likelihood of losing invested funds is lower.
“At the same time, the cryptocurrency or Forex market is not regulated at the legislative level,” the expert clarifies. “Accordingly, the risk of losing savings is much higher.”
Don't confuse investment and speculation
When investing money, you should not rush to benefit as quickly as possible. Buying and selling portfolio items every day, according to statistics, does not pay off in most cases. It is important to remember that any transaction imposes certain financial obligations on the investor: the need to pay a commission to the broker, to pay part of the amount for withdrawal of funds.
“Rebalancing the portfolio, that is, restoring the proportions of assets, should be carried out no more than once a quarter,” the expert notes.
Don't mess with crowdlending
A beginner's investment portfolio should not include investments in young, developing companies and startups. Theoretically, crowdlending (lending to companies by individuals) can bring good profits: borrowers promise to return the money with a high interest rate. But in practice, everything may turn out differently.
“If you are approached with an offer to “loan” to a developing company, ask why this company did not take out a loan from the bank,” advises Andrei Mozol. - The answer will be on the surface. The founders of the company are responsible to the bank with their property, but not to you.”
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Educate yourself
Increase your awareness in the field of investments: read specialized literature, business magazines and newspapers, watch the news, take an interest in the financial sector and the economy as a whole. Study those investment tools that are not yet known to you, deepen your knowledge of those that you already use.
Seek advice from investors who have their own experience, and ignore the advice of theorists who have studied the educational literature well, but have never used their knowledge in practice. Never invest on the advice of friends, acquaintances or relatives who were able to take advantage of a “unique opportunity” but themselves do not have any knowledge or skills in this area.
Do not copy other people's portfolios, since even the “set” that at first glance suits you may not lead you to your desired goal. Check this issue with a financial advisor, who will help you create an investment portfolio taking into account your requirements and objectives.
