How to build up Your Tailored-Made Portfolio?
Now that You have acquired the most important rules of investing in Stocks (Stock Markets Basic Rules for LADIES), You can get into the more specific details of building up a portfolio that fits Your own needs. It goes without saying that You should always keep Your risk appetite in mind.
This will go in parallel with a very important step of analyzing Your basic needs such as age factor, earnings, financial goals for creating wealth and how to preserve Your wealth according to your family’s situation too.
First of all, let me tell You what does Asset Allocation mean?
Asset Allocation refers to the strategy of dividing Your investments within Your portfolio among different asset classes/categories, such as stocks, bonds, real estate, cash, gold and cash alternatives. Asset allocation aims to control risk by diversifying an investment portfolio.
1- Do Your assets match Your ‘Needs’ Hierarchy’?
Your Asset Allocation needs to ensure that the most important and most basic needs of Yourself and Your family, if any, are taken care of in the most secure and precise manner.
And what better way to do this than to invoke the hierarchy of needs theory by the famous psychologist Abraham Maslow?
The bottom of the pyramid denotes the means to satisfy most Your basic and elementary needs. As You move up the pyramid, Your elementary needs being taken care of, then You can afford a slightly higher risk profile to seek better returns to satisfy Your tertiary needs.
The above pyramid is a reflection of a conservative asset allocation respecting a relatively conservative risk profile.
2- How to preserve Your wealth? Which instrument to choose?
There are different asset classes that help You safeguarding and growing Your wealth…provided the allocation is as per Your risk appetite… Always!
I suggest the following allocation as instruments, keeping a balanced risk profile investor in mind:
- Cash – It is a good idea to keep cash in hand to buy good bargain assets in the event of a market collapse. As such, You could keep about 10 to 40% of Your portfolios in cash.
- Gold – Having at least 5% of Your assets in gold will give You that insurance policy that will protect Your portfolio when things go bust.
- Property – Property will ensure that when times turn bad, most of Your income does not go towards meeting the EMI expenses (Equated Monthly Installment) on Your loan. Clearly, there’s no bigger relief than watching the roof on our heads become debt free!
- Bonds – To protect Your wealth against inflation and to earn a fixed rate of income, it is traditionally worthwhile having debt instruments in Your portfolio. It helps You get the assured and steady returns while taking on lower risk as compared to stocks.
- Safe Stocks – Finally, we come to Stocks, as growth assets, which have the potential to offer You returns well over the inflation rate. This is needed for the wealth to grow in real terms.
– The rule of thumb used to be that You should subtract Your age from 100 – and that’s the percentage of Your portfolio that You should keep in stocks.
– For example, if You’re 30, You should keep 70% of Your portfolio in stocks. If You’re 70, You should keep 30% of Your portfolio in stocks.
We are not talking about any Stocks, but safe Stocks. These are stocks that have strong fundamentals and capable managements that can be found in every category of market capitalization -large caps, mid-caps and small-caps, multi-cap funds, hybrid funds, international funds, and so on.
3- Asset Allocation according to Your age, Your family situation …
Keeping in mind that we can’t have a ‘one-size-fits-all’ strategy, I suggest broadly different and necessary key assumptions required towards several investors’ profiles.
Let me look at asset allocations at various stages of Your life:
A Lady at her 30 marks: For a young lady who is 30 years old, earning well, she might be still singly, so no family commitments, will work say till 60 years and with a high-risk tolerance level, her equity/stocks allocation can be between 70-75 percent. Her allocations in equity can also be in midcap and even small-cap funds depending on these factors.
A Lady at her 45 marks: Another Lady who is 45 years, might be single, in a couple with/without kids or divorced, having moderate risk appetite, who is expected to retire at 60 and has good surplus every month can probably invest between 50-55 percent in equity assets. The equity investments for this Lady may be lower as her risk profile is moderate and the number of years to her retirement is only 15 years.
A Lady at her 55 marks: Take yet another case of a Lady who is 55 and is set to retire at 60 years. She might be in a couple or divorced, have kids that need no more school tuition spending. This Lady has a moderate risk appetite and I suppose depending on her family situation again she has good surpluses every month. The allocation in equity assets for her can probably be between 45-48 percent.
A Lady at retirement: For a Lady nearly at retirement, single, in a couple, divorced or widow, the typical equity allocation would be close to 40 percent. For retired Ladies, I will allocate anywhere between 10 percent and 40 percent in equity, based on their risk tolerance levels, risk capacity, income needs and how much of their corpus can be locked in to equity given their upcoming goals in terms of travel, gifting, EMI expenses and so on.
Conclusion
Ladies, we strive hard to build up our wealth, to guarantee our financial independence and to impose our overall freedom!
We work hard, scrimp, save, make adjustments, and finally save money – for us, for our dreams, for our children and their dreams. Somewhere, however, we are so busy trying to survive in our race against time that the money we work so hard to earn is invested quite quickly, without giving it the due thoughtful consideration.
Are Your investments in tandem with Your current and future needs?
This is where the mantra of a meaningful Asset Allocation comes handy, and where Lady Expert Investor will make it happen for YOU IF…
YOU MAKE THE FIRST MOVE!!!