The main thing is a good sleep: how to build an investment portfolio for a beginner

Main Rules

Starting your path as an investor, you need to remember the following postulates:

– The higher the return on investment, the higher the risk. And it is more important not to lose money, to preserve the existing capital, than to hit the jackpot.

– There are no guarantees in investments. If someone guarantees you something, it is a scam.

– There are no “magic pills” and absolutely working “chips” either. It is impossible to avoid risks.

The two basic concepts in investing are return and risk. Return refers to the change in the value of an asset. Past profitability does not guarantee that it will be exactly the same in the future. This is a relative indicator of the effectiveness of your investments, it allows you to compare assets with each other. Returns can be positive or negative. If they say that the potential return of an asset is 20%, this means that it is planned to earn 20%.

The likely amount of deviation in the value of an asset is called risk. In the language of mathematics, we can say that risk is the most probable deviation of the asset price from the predicted value. If the risk of an asset is 35%, this means that with a high probability the value of the asset can change up to 35% in both directions. She can fall and rise. That is, risk is just the amount by which the price of an asset can change, and not the possibility of losing all your money.

For assets, the amount of potential return is usually slightly less than the amount of risk. Profitability and risk are interconnected, their ratio is the most important indicator for an investor.

Each investor has his own psychological attitude to risk. Someone is ready and able to take risks, ready to withstand strong drawdowns in their portfolio in value. Someone is not ready to endure a drop in the value of their assets at all, these are the most conservative investors. There are investors with moderate risk tolerance, in the middle between the first two groups. And in accordance with his attitude to risks, with his comfort, his preferences and goals, the investor chooses a strategy for himself.

Risks on the way of the investor

The strategy must take into account possible risks and protect against their consequences as much as possible. That is, risks can and should be managed.

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Diversification is protection against market risks, the risks of a fall in the value of the portfolio as a whole. Different asset classes solve different problems in the portfolio. Stocks provide a long-term increase in value, bonds create a regular interest income and allow you to earn money in a crisis. Other instruments also work as diversifiers, protecting the portfolio from risks. For example, gold protects the portfolio from inflation, as during the period of depreciation of money, gold rises in price. Choosing a different ratio of asset classes, the investor achieves an acceptable ratio between profitability and risk.

The investor must sleep peacefully. He should not wake up in a cold sweat when the value of assets declines during a crisis. Falling asset prices are not the only risk to be aware of and manage.

The risk of bankruptcy of a financial intermediary. Protection against this risk will be the choice of a reliable broker or bank. And for large capitals, these are investments through segregated or trust accounts. For the owner of large capital, the risk of protection from third parties is relevant. The use of not a broker as an intermediary, but trust structures and add-ons will help here.

Risk of deviation from the chosen strategy and breach of discipline. To be honest, in 20 years of investing, I have not met a single person who systematically, regularly and without failure invested according to his strategy. Protection against such a risk will be the support of loved ones, a community of like-minded people, or investment programs with mandatory payments, which I call a financial mortgage.

The risk of not being able to invest due to loss or decrease in income. Protection against such a risk will be the presence of a financial cushion, constant work to increase income, work on oneself. A simple example of the need to increase income is that inflation makes money cheaper. This process is natural and uninterrupted. If your income does not regularly increase, you will constantly become poorer, since every year you can buy less and less goods for the same amount.

Everyone can choose the right investment strategy for themselves. And even small but regular investments will allow you to create capital.

The most important thing is to remember the risks and manage them.

How to form long-term savings

Everyone around talks about the need to make long-term savings, but almost no one tells what it is and how to form them correctly. The maximum is to give your money to some regular pension or investment fund.

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Long-term savings is money that is accumulated to achieve a large goal, delayed in time. It could be buying a house by the sea, educating a child, or securing a dignified old age. The term of such savings is over ten years.

Money is the resource you need to achieve your financial goals. You set a long-term goal, and determined how long you need to achieve it. What’s next? Simply putting the amount saved from each salary under the mattress is extremely inefficient. Inflation will eat up the lion’s share of such savings. In order to achieve the goal faster, money must not only be saved, it must be invested using instruments whose profitability is higher than inflation.

Let’s do a simple calculation. Suppose we need 1,000,000 rubles in 15 years. If we just save, then we will need to set aside 5,556 rubles every month. If we invest for 15 years at 10% per annum, then we will need 2,510 rubles a month, or only 30,120 rubles a year (the formula for compound interest was used for calculations). The costs turned out to be two times less than with savings under the pillow.

Investing is a process where you make the money you earn work for you, and not lie somewhere under the mattress. They must work, constantly and without your direct participation.

The basic principles of investing are as follows:

– Investment instruments are selected individually, taking into account financial goals, the degree of risk tolerance and preferences. Each investor has their own approach to the process. Someone is ready to actively trade on the exchange, and someone is not ready to spend time on this, and chooses a passive strategy. Someone will react calmly if during a crisis his portfolio of stocks doubles in value, while someone is not ready for such a rollercoaster, and chooses bonds that do not lose much in price even in a crisis.

– The investment portfolio needs to be diversified, to include assets of a different plan. If one asset falls during a crisis, the other will not allow the portfolio to reset. Diversification will also protect your portfolio when individual companies fail.

– Time, regularity, discipline and compound interest – it is this combination that will allow you to create capital over time.

– Passive portfolio investment is available to any person. According to my practice, it is not difficult to learn this approach even for a beginner in a few hours. This strategy will allow you not to waste time and resources on the process, you will not need to understand the analysis of companies, constantly monitor the market and respond in real time. It is enough to draw up a portfolio that is suitable for you in terms of the composition of assets once, and devote a couple of hours a year to adjusting it.

– The investor needs to create a reserve fund. When force majeure happens and money is urgently needed, the reserve fund allows you not to get into the investment portfolio.

– Borrowed funds cannot be invested. There is no guaranteed income from investments, and the bank charges interest on the loan without gaps.

– Investing without a goal is money down the drain. Only knowing the end point and route, you can get to the goal.

Where to start and how to treat

A novice investor should start with the most conservative instruments. These are bank deposits and bonds issued by reliable issuers. The most reliable issuer in Russia is the state. Therefore, federal loan bonds have the highest reliability rating. By purchasing bonds, the investor will receive coupon income – this is the money that the issuer regularly pays to the bond holder.

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Keep your main portfolio in passive investments, this will become a reliable foundation for future capital. Passive index strategies do not require large resources. The main thing is not to make passes, even at the time of the crisis. On the contrary, regular investment during a crisis will allow you to buy more securities cheaply than in normal times.

Large capital can and should be created with small regular investments that are comfortable for your budget. Investments should not become a yoke for you, they should fit naturally into your life. Focus on work, business, family, hobbies – and invest according to the strategy that suits you.

The main thing for an investor is restful sleep. It is a well-chosen strategy that allows in a crisis not to worry about the state of the investment portfolio.