Most well constructed long term trading strategies and investment portfolios have these 3 things in common. They have strategic focus; they are well diversified and they have balanced positions.
Managing your own investment portfolio can be a daunting task, and it could take years of experience before you’re able to outperform the market. Before creating your own portfolio, it is crucial to identify your goals for the portfolio, whether it be for receiving regular dividends or exploiting growth opportunities. The decisions made in portfolio management are dependent on the goals of your portfolio as well as your individual degree of risk aversion. However, well performing portfolios generally possess some characteristics in common which we will now explore. You could potentially increase your portfolio’s profitability by ensuring that your portfolio possesses the following characteristics:
Diversified:
Having a well-diversified portfolio by allocating investments in such a way which spreads exposure across the GICS sectors can greatly reduce your portfolio’s variance of returns and could potentially help in improving the risk adjusted return as different sectors can perform well at different times. You can also increase your diversification benefit by adding exposure to foreign equities since investing in foreign equities can effectively lower the amount of systematic risk in your portfolio as foreign investments are less likely to be affected by domestic market changes.
Balanced position weightings:
At Rivkin we generally advise maximum position sizes of no more than 6% although for lower value portfolios this can be increased to as high as 10%. The portfolio’s performance will be largely dictated by the performance of any overweight positions and therefore a large degree of risk will lie with those individual positions. On the other end of the spectrum we recommend minimum position sizes of no less than 3%, otherwise any meaningful out-performance of underweight stocks won’t really contribute to the overall performance of your portfolio and should either be sold or bought in larger quantities.
Strategic:
Having an investment strategy is an essential part of portfolio management. At Rivkin we like systematic investing since it enables us to have a response to any market occurrences or share price movements, independent from any emotion that the investor may be feeling. A lack of strategy leaves one exposed to emotional decision making which could be detrimental for your portfolio’s return. Some well-known emotional trading biases include cognitive dissonance and home bias. The first of which occurs when an individual believes two contradictory things at the same time and can consequently lead to irrational decision making as they manipulate their beliefs to justify their actions. For instance, an investor holding a certain stock could ignore negative announcements pertaining to the stock and actively seek out positive information about the stock in order to justify holding the stock. Home bias refers to the tendency for individuals to invest the majority of their portfolio in domestic equities. This kind of bias may restrict the investors’ potential diversification benefits and could thereby negatively impact portfolio returns.
Rivkin offers a variety of trading strategies which aim to give investors an edge when navigating the market. Investors could potentially maximise their portfolios’ diversification benefits by combining various portfolios offered by Rivkin. For example, an investor who currently has exposure to domestic equities from their investment in Rivkin’s ASX Momentum strategy can increase their diversification benefit by adding exposure to foreign equities through Rivkin’s US Momentum strategy.
