An essential principle of controlling financial risks is building an investment portfolio. The fact is that no professional trader would invest all his money in any one asset, but would choose a number of securities and distribute his money among them.
A portfolio would generally include shares of all sorts of companies: from startups to market giants, from firms engaged in raw materials exports to the most innovative and advanced business projects. With a sound securities portfolio built, an investor knows that if a sudden downturn takes place or the worst-case market situation develops, he will not lose too much, and under a moderate or positive scenario, he would be able to make pretty good money.
Portfolios are divided into:
- conservative portfolios characterized by modest potential returns and minor risks;
- moderate portfolios brining medium-level potential earnings at average risks;
- aggressive portfolios — such portfolios normally include small technology companies that can show a strong growth and make their benefactors rich within a short period of time. However, the risks of losing money, is such an approach is chosen, are very high.
First and foremost, an investor determines the type of portfolio he needs and proceeds with that idea in mind. If the main goal is to save money and protect it from inflation, the conservative approach would be a reasonable choice. The moderate approach is most prevalent, as portfolios of that type have the best risk-return ratio. However, there are quite a few die-hard romantics and adventurers in the world of finance, so aggressive trade and venture investments have their followers.
Selecting the securities is an ongoing process that never stops, not even for one day. All world-famous investors spend much of their working time analyzing shares of various companies, studying the financial statements of such companies, monitoring their corporate policies and market positioning.
The securities having appropriate fundamental and technical indicators are bought up on stock exchanges, and this is when the most important and demanding part of the work — investment management — starts.
Traders have a saying that it does not matter where you have entered the market, what matters is where you have exited it. There is a grain of truth in it, because if you sell a financial instrument too early or hold on to it for too long, you can lose a significant portion of your money or lose potential profits.
It is important to understand that professional investors do not just buy assets to put them on the back burner. Investment is an ongoing process, a daily practice, most of which remains unnoticed by others. It seems all you have to do is buy a security at the right time and sell it at the right time, but what happens in between is a lot of hard work, sleepless nights and financial statements read and re-read hundreds of times.
Investment portfolio building strategies may differ in their mechanics, but each of them is based on the principles described above, in one form or another. The investor is constantly busy analyzing financial instruments and market trends taking well-weighed actions, albeit not too often.