How to make an investment portfolio for the purpose and risk

Each investor must have his own individual portfolio for its purpose and risk. In this case, the distribution of assets depends largely on several simple parameters. We have prepared a step-by-step plan, how to find the optimal relationship between stocks and bonds in the portfolio, choose to make tools for this and determine the shares of countries.

Step 1. Determine your financial goal and risk profile

In the long-term investment, the purpose of the purpose and determination of individual parameters, including the risk-profile, is played. About how to put goals correctly, we already wrote (

You can determine your risk profile using a simple




There are also more detailed tests that determine the risk profile, including based on investment periods. For example, such a methodology has

Determination of the risk profile after passing the test on the Schwab methodology

There are other tests, such as

The structure of the portfolio, based on the risk profile after passing the test on Schwab

Despite the rather detailed detail of the assets class in the portfolio on the Schwab Recommendation, the key factor for further work on the distribution structure is the choice of the relationship of shares and bonds in it.

Step 2. Find the optimal shares and bonds in the portfolio

It must be remembered that more time to achieve the goal allows to use a more risky distribution of assets (consequently, with a higher share of shares). This is quite simple: the more investment horizon, the more risk can take on an investor.

Examples of investment portfolios with different distribution of assets depending on the horizon of investment and potential yield

How to take into account all the factors (profitability, risk profile, investment horizon) and understand that the selected distribution will allow to achieve the financial goal? The most popular way to solve this problem is to compare the required profitability of investments with the expected profitability of the portfolio with a given relationship between shares and bonds.

As a possible future profitability, you can use the Credit Suisse data on the average annual profitability of shares and bonds over the past 120 years. For convenience, we have compiled a table in which the expected (average annual) yield of different combinations of two assets classes were calculated. Of course, it is worth adjusting this picture on the current estimates of profitability. According to the stock funds, for example, we bring them to

The average annual yield of different combinations of assets class

Does the expected yield coincide with sufficient to achieve financial goals? If the answer is «no», then the investor should be revised by the original conditions. For example, you can:


Step 3. Select tools to distribute stock share and bonds and make your investment portfolio

After the investor decided with the realization of shares and bonds in the portfolio, you can proceed to the selection of specific tools. The stock portfolio should be represented as a wide range of assets of both developed and developing countries.

To determine the shares of countries, you can be repelled from the global capitalization of markets. For example, the overall distribution of developed and emerging markets in accordance with their capitalization may be like this:

Global market capitalization distribution

From everything

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