Story of Interest
Written by: Tao Sun
How to Build Your Own Portfolio as an Individual Investor?
Know Your Investment Style
Begin by asking yourself: Am I an active or passive investor? Do I like to invest long – term or short – term? What is my maximum risk tolerance? An investor should have very clear answers to those questions before he/she enters the market, which clearly depicts the investment style of the investor. Therefore, the investor can choose an investment strategy that aligns with that style.
Choose Your Targets Wisely
Among various investment targets, e.g., bonds, stocks, mutual funds, hedge funds, ETFs, futures, options, etc., an investor should choose the targets that match his/her strategy and investment style, otherwise, there will be a relatively higher possibility that the investor may make mistakes. For instance, imagine a conservative investor invests in the options and futures market, which is highly risky and volatile. The big fluctuation may cause a big unrealized loss in the account, which goes beyond the investor’s tolerance, and thus, in turn, makes the investor unconfident and irrational. With such a condition, the investor may easily make mistakes and lose money.
Arm Yourself with Knowledge and Skills
There are a lot of things we need to learn to understand what is going on in the market and what we can do. We need to understand Economics to see whether a certain market has solid foundation, to know industry analysis to pick out the industry that has the great potential to grow, to use different valuation strategies to find the most appropriate value of a company and to know technical analysis to choose the best time to enter and exit the market. There is an old metaphor about the relationship between the economy and the secondary market. The economy is like a man who is walking a dog, which is the secondary market. Sometimes the dog is ahead of the man and sometimes it is after the man, but the distance between the dog and the man can never be longer than the rope. Sophisticated skills and knowledge enable an investor to predict the activities of the man and the dog and thus to capture the investment opportunities effectively and efficiently.
Keep Yourself Updated
Some investors think they are done if they complete the previous steps – the answer is NO! The reason is that the market is highly changeable and sensitive to many things (e.g., news, statistical data, important events, etc.) Therefore, everything is temporary. Investors need to make sure that they know what is going on in the market and how will those events and numbers impact their portfolio and take actions accordingly.
Challenges That You Need to Overcome
The top two enemies that investors should beat are fear and greed. Because fear usually stops you from capturing good investment opportunities and greed usually stops you from putting the profit into your pocket. To overcome these two challenges, Warren Buffett provided a great guideline: “Be fearful when others are greedy and be greedy when others are fearful!”
Conclusion
Build your own portfolio is definitely not an easy thing to do. But on your way, you are learning new knowledge and overcoming your flaws – it is the best way to improve yourself. And one day when you are successful and looking backward, you will feel that it was really worth it!
