Portfolio management is an important skill in investing.
Take on too much risk and you may be left with sizeable losses. Take on too little risk and your returns will be mediocre.
So how do we balance risk and returns?
Given the uncertainty surrounding the market today, I thought it would be an opportune time to share some portfolio management tips that I believe investors can adopt.
Mind the size
Whatever you invest in, it is important to invest an amount that you are comfortable with.
Of course, this can vary depending on the size of your portfolio, your investment strategy, investment horizon, and even your risk appetite.
For stock investors, I encourage you to invest no more than 5% of your entire portfolio capital in a single stock. This reduces the risk that a sudden drop in price in the stock will have a detrimental impact on your returns.
It is not uncommon to find stocks fall more than 30% and never recover. Sometimes it may not be the fault of the investor. Unforeseen circumstances can cause a sudden and irrecoverable disruption to a company’s previously sound business.
We can avoid potentially painful losses when we sufficiently diversify our investments.
Manage the risk
Adding to the first point, it is important to assess the risk-reward profile of a particular investment.
For an investment such as a high-growth stock that has a high-risk but high-return possibility, it may be wise to size down your investment to reduce the chance that a permanent fall in the price of the stock will cause a large loss to your portfolio.
Keep cash in hand
Although not all portfolio managers may agree, I prefer to keep some cash in hand. The cash will come in handy when a bargain suddenly appears in the market.
To ensure that I have the means to take advantage of an investment opportunity, I hold 5% of my total investment capital as cash.
There are, however, exceptions to this rule. If stocks have seen a market-wide decline, presenting plenty of investment opportunities, it may be wise to be fully invested to make the most of these bargains.
Get Smart: Portfolio Management Simplified
Obviously there is no one-size-fits-all strategy to invest well. Investors need some investing experience to personalise their own portfolio management according to their goals and needs.
However, these three strategies can act as a framework for how to manage an investment portfolio.
None of the information in this article can be constituted as financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life.
Note: An earlier version of this article was published at The Good Investors, a personal blog run by our friends.