Asset Allocation - 5 Important Steps to Consider While Creating a Successful Long-term Portfolio

A portfolio is a combination of different stocks from the different sectors. Investing can help investors take advantage of compounding returns and grow the investment amount.

The composition of investments in a portfolio depends on a number of factors such as investor's risk tolerance, investment horizon and amount invested.

Diversification:

Diversification is one of the basic building blocks of a good portfolio. Diversification reduces risk by allocating investments. It aims to maximize return by investing in different areas that would each react differently to the same event. Diversification can help an investor manage risk and reduce the volatility of stock price movements.

A portfolio is a combination of different stocks from the different sectors. Investing can help investors take advantage of compounding returns and grow the investment amount.

The composition of investments in a portfolio depends on a number of factors such as investor's risk tolerance, investment horizon and amount invested.

Asset Allocation:

Asset Allocation is the most important factor in determining the expected long-term performance and return variability of a well-diversified portfolio. In other words, the asset allocation plays a key role in determining portfolio's overall risk and return.

Risk & Return Analysis:

All investments involve some risk, even seemingly "safe" investments. Investors should consider risk taking ability and willingness before committing fund to portfolio because not every asset is suitable for every investor.

Do proper research and avoid information cramming:

Research is a backbone of every investing. Research assists the decision-making process with as much relevant information. One can use top down approach or bottom up approach. Research on companies helps investors understand the health of its business and its future prospects.

Among the quantitative factors, five factors to select stock are Earnings, Profit Margins, Return on Equity (ROE), Price-to-Earnings (P/E) and Price-to-Book (P/B).

Hold some portion in cash:

A well-balanced portfolio should have some space for cash to maintain liquidity in the portfolio. Liquidity will help rebalance the portfolio in case of market movements. Rebalancing would help the investors earn better returns.

To conclude, a well-balanced portfolio helps investors earn maximum returns.