DIY Portfolio Management – A Simple Approach To Beat The Pros
Managing your own investment portfolio might seem daunting, especially when you’re up against seasoned industry professionals on the other end.
However, most people fail to realize the substantial advantages in-terms of returns and maneuverability that come with small account sizes. Even the Wizard of Omaha, Warren Buffett himself acknowledges the significant upper hand that smaller investors have, provided they know what they are doing.
In addition to this, most institutional investors, whether they are hedge funds, mutual funds, ETFs, or CTAs, consistently underperform broader indices given a long enough timeframe. Over the past 10 years, 85% of large cap funds have trailed the S&P 500, all the while continuing to earn fat fees.
All of this shines a softer light on DIY portfolio management, and for investors who put in the time and effort to educate themselves, study the markets, and pick the right stocks, it is very much possible to beat the pros at their own game.
1. Understand Your Financial Goals
As is the case with all financial planning, it starts with a thorough overview of your goals. Are you saving for retirement, a down payment for a house, or your children’s education?
The risk profile and time horizon for each investment depends largely on your goals, both short and long term, based on which you can tailor your portfolio to suit these requirements. For example, if you are on the verge of retiring, a portfolio exposed to equities predominantly might be too risky, but that isn’t the case for young professionals who can afford to take more risks.
Young investors with no family, dependents, or debt can afford to take plenty of risks, and allocate their savings in various high risk, high yield volatile opportunities that might pay-off in the long run. The same would not be prudent for those in their late-20s or 30s, once they have a family to support.
2. Research & Due Diligence
DIY investing requires a lot of time in-terms of researching and performing due diligence on each individual security.
This involves going through a company’s financial statements, shareholder transcripts, and recent earnings reports, all in order to get a good understanding of its fundamentals, financial position, and future outlook.
Fortunately, there are plenty of research reports and commentaries on each individual security in this day and age, which should make this process less cumbersome, provided that you find the right sources of information.
3. Asset Allocation & Diversification
At its core, portfolio management is all about asset allocation and diversification. It starts with determining the right percentage of your assets to be held in risky assets such as stocks, with the rest in debt, and cash.
As discussed above, young investors just getting started in life can afford to risk higher allocations in favor of stocks, but retirees would prefer the safety of bonds with fixed interest rates.
A good rule of thumb in this regard is subtracting your age from 100 to determine the percentage of your portfolio that needs to be in equities. So, if you are 30 years old, it is good to have no more than 70% of your assets in equities.
In addition to this, a good portfolio also gives extensive consideration to diversification. This works by spreading your risk across asset classes, industries, and geographies.
For example, having energy stocks in your portfolio in 2022 would have been a great way to deal with the shock of the war in Ukraine, and today it is also possible to own part of a stock, so no matter how small your account, it is possible to diversify.
4. Monitoring & Rebalancing
Even a portfolio that is held keeping in mind a long time horizon needs to be actively managed in order to augment returns, while beating broader market performance.
This requires regular monitoring of performance, along with rebalancing of the portfolio to ensure that it remains aligned with the investment goals and objectives, along with the target risk profile.
Such an active management style is essentially a double-edged sword, something that can drive better returns, but can just as easily eat into potential returns when you fail to time the markets. This is also a skill that is acquired over years of monitoring the market, and as a result, newcomers should tread lightly in this regard.
Final Words
DIY portfolio management is a truly empowering approach that allows individuals to take control of their finances, and potentially beat the returns generated by institutional fund managers.
Given the advancements in trading technologies, and the abundance of resources available for retail traders and investors, anyone can get started with this, provided they put in the effort to educate and train themselves first.
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