DINEO TSAMELA: Four steps to setting up your DIY investment portfolio
Guidelines portfolio managers use that you can try to incorporate into your personal portfolio management
The rise of do-it-yourself investing has taken an exciting turn in South Africa. As more and more brokers make share investing accessible, people are taking an active interest in managing their own investments.
DIY investing requires a lot of work. Managing your own money isn't easy, and losing it hurts. Simply picking the right stock is not enough. You need to have a plan. Not everyone has the time to do a portfolio-management course, especially if they just want to learn to manage their own little portfolio.
However, there are guidelines portfolio managers use that you can try to incorporate into your personal portfolio management to get the results you want.
Portfolio management consists of four broad phases.
The first step in the process is your investment strategy. This is the plan you put in place, based on your goals and the outcomes you want. You can use the "smart" goal-setting approach for goals that are specific, measurable, attainable, relevant and timely.
You need to understand the risk you're willing to take. How much are you prepared to lose, and does your outline accommodate this scenario?
You must also identify external factors that may affect your returns. These will range from tax to interest rate changes, exchange rate movements and market activity. Following the news closely and using websites such as investing.com or resources offered by the online broker you're investing through will help demystify what's happening in the market and why it matters to your portfolio.
Part of the planning phase also involves asset allocation. As with risk, asset allocation needs to be aligned to the desired outcome. Understand the various asset classes and how they react to events in the market - in the short and long term - and the impact that has.
If you want high returns, you must be willing to invest in riskier securities.
Second, having figured out an asset class mix, you now have to select the securities in each asset class. If you've decided to allocate 60% of your portfolio to equities, you need to decide which equities you're going to put in there. Are you going to pick individual stocks, or will you go for an equity-based exchange traded fund - or a combination of both to help manage your risk?
The third phase of portfolio management involves monitoring the performance of your portfolio. If you're investing with a long-term view, it's probably best to set out a calendar for how often you'll be looking at your portfolio. Checking daily will most likely lead to you being paranoid and cause you to make snap judgments based on short-term moves.
When monitoring, look at measuring your portfolio's performance. This allows you to compare your portfolio's performance relative to other benchmarks. If your aim is to beat the market, you'll compare your portfolio's progress to the JSE All Share index, for example.
The fourth part of portfolio management is rebalancing your portfolio. At times, certain securities fall short of our expectations, or our objective shifts and elements of our portfolio become irrelevant. Rebalancing your portfolio will help you stay the course. Sometimes the rebalancing process involves adjusting your goal.