This time, let’s take a look at how to build a portfolio.
When creating a portfolio, the first step is to decide the general framework by determining which sectors to invest in.
Next, determine the distribution of risk and return. There are three levels of risk-return: high, medium, and low. Think about how you want to allocate them.
As a guideline, you might consider allocating 10% to 20% in high-risk, high-return products, 50% to 60% in medium-risk, medium-return products, and 30% to 40% in low-risk, low-return products.
Then, examine the investment products or assets you’re considering and classify them according to the level of risk they represent.
For example, real estate or mutual funds may be categorized as medium-risk, but that doesn’t always hold true. Depending on the product, it could be classified as high-risk or low-risk, so be careful.
Also, if you have too many high-risk products, your overall risk increases. Keep high-risk products within 20% of your portfolio.
When considering the key element of a portfolio—risk diversification—it’s important to take into account three types of risk: “liquidity,” “exchange rate fluctuations,” and “country risk.”
Liquidity risk refers to the inability to withdraw money freely. Products with long lock-up periods or assets like real estate that can’t be quickly converted to cash are prime examples. It’s advisable to avoid products where funds are locked up for more than 15 years.
As for exchange rate fluctuation risk, many people may already be experiencing this. When a currency drops in value, the purchasing power decreases accordingly, and the value of your assets diminishes as well. Holding part of your assets in foreign currency can help diversify this risk.
Country risk refers to the potential negative impact on asset management due to political instability or war in the country you are investing in. Extra caution is needed when considering investments in developing countries.