A well-diversified portfolio is how many investors have achieved their financial goals. Crypto investments, for instance, need a good balance of high-risk, high-reward coins blended with low-risk assets. That is, having top coins like Bitcoin or Ethereum and low-cap altcoins like Pepe or DOGE. The essence of this division is that such a combination allows traders to reign in their losses or spread the risk ratio across multiple securities. The same could be said for many other financial assets, but it is also important to know that diversification alone will not always save you. A constant portfolio is another step to take when managing investments, and we walk you through five steps to help evaluate your portfolio.
Assess Your Allocation
Financial investments all come with their varying risk rations. The instance in the intro paragraph already gives a little context to this, but to go further, it’s important to note that some assets are high-risk and volatile. At the same time, they require higher financial capital. 1 BTC, for instance, sells for $10,900 at the time of this writing. On the other hand, 1 PEPE sells for $0.00001841. Based on the price point, it’s already a given that BTC is far more risky than PEPE, and if an investor were to lose 1 of each, the financial burden for one far outweighs the other. Asset allocation assessment in investments and online trading requires reviewing your blend of investment choices and maximizing your proximity to lower-risk exposure. However, it’s arguable for some that having high-risk assets could be a plus because of the equally high return that it accompanies. However, these assets take up a huge chunk of your portfolio. Hence, it should be accompanied by more securities that can help offset the risk. Diversification is essential, and there is no doubt about this, but consider assessing your allocation to be sure you have a good balance from time to time. This process might involve selling off some products and replacing them with others you feel more confident about.
Measure Portfolio Performances
Bookkeeping trading income is an important aspect of foreign exchange trades and many other investments for several reasons, and one of them is to keep proper tabs on profits and losses. Traders use tools like trade journals and manual logs to record their wins, losses, and strategies, which helps with both. Such a method is one way to measure portfolio performance. The logs also help you take note of essential information in your trade processes, such as currency pairs traded, entry and exit prices, the best time to trade certain markets, and more.
Aside from keeping records, you can utilize models like risk-adjusted return, which measures an investment’s return concerning the degree of risk taken to get such results.
Assess Costs and Fees
Regardless of the financial asset, every transaction comes with a fee; tax implications and other overhead costs significantly affect your overall profit margin. For forex, some fees include spreads, commissions, brokerage fees, and overnight premiums, and the amount paid can differ based on the trading platform or brokerage service you use. Review daily costs and fees for high-expense rations that may eat into your returns.
The tax implications for assets also differ considerably, so identify which are considered tax-free investments. Forex and cryptocurrency assets, on the one hand, are taxed, falling under capital gains or income gains depending on the duration of holding and the overall income. On the other hand, tax-exempt exchange-traded funds and municipal bonds are examples of assets that do not come with such implications. You can factor these elements in while assessing the costs and fees needed to manage your portfolio.
Check for Overlap in Holdings
Regularly evaluate whether you have the same or similar investments across your accounts. Overlap occurs when multiple investments hold shares in the same companies, sectors, or assets, which can unintentionally increase your risk exposure since it negates the point of diversification. A typical example is how many mutual and exchange-traded funds (ETFs) often track similar indexes or invest in the same top stocks and large-cap companies. Check and readjust as needed if there are similar loopholes in your portfolio.
Revisit Your Investment Goals
Revisiting investment goals is essential because it ensures your plans align with evolving circumstances, market conditions, and long-term objectives. Over time, your priorities may shift. For example, you may start with a goal of aggressive growth for retirement, but as you near retirement age, your focus may shift to preserving wealth and generating additional income. Hence, you start considering long-term opportunities and a few short-term and quick high-return assets.
If you’re planning or investing toward a particular goal, like buying a home or starting a business, consider adjusting your portfolio to include liquid assets like certificates of deposit and short-term bonds. Lastly, market and economic conditions like inflation, interest rates, and volatility may require you to occasionally readjust your portfolio allocation.
Start Small, Start Now
One misconception amongst most investors is that rules like portfolio management only apply to large-scale investors. This is completely false, and the best advice anyone can give you today is to start implementing such models once your initial research and goal-setting are complete. If you do it well, whether as a small-scale investor, retail trader, or a beginner, you stand a higher chance of scaling to the top.
