A brief overview of Financial Goals
In the present financial environment, a well-constructed portfolio is crucial to any investor. As an individual investor, he must see how an asset allotment is done that best complies with his own investment objectives and risk appetite. At the end of the day, the investor’s portfolio should meet their future capital prerequisites. Investors can develop portfolios adjusted to investment philosophies and strategies by following a systematic methodology.
Before anyone starts working on building a perfect portfolio, with a purpose to maximise their returns, in minimum possible time, the most important thing to ponder upon would be the individual’s financial goals. One needs to set the financial goals they want to achieve, and a time period in which they would want to achieve them. This will allow an individual investor to put a plan in place and will be a major factor in defining what a portfolio for the individual would look like. The setting of financial goals also follows the listing down of the assets and liabilities that the person owns and owes, which will allow them to understand their financial position and will also help them understand the gap between where they stand and where they have to reach. This consequently will allow them to understand the asset allocation they can afford to make within their portfolio.
Before we move further, it is important to first look at the factors that can impact a portfolio.
Factors that can impact a portfolio
- Age of the Investor
One of the most important aspect, when one considers setting up a portfolio is the age of the individual. The reason behind, age being an important factor is that it will characterise the investors’ financial needs and quantify what their objectives are. This will additionally distinguish the attributes of the sort of assets that the individual decides to allocate in their portfolio. For a younger investor, assets which can produce long term returns will be best as they will have a longer time horizon, though, for a matured and older individual, assets that can produce a regular income will be generally the choice. Most assets, for example, stocks and bonds can be characterised according to the age requirements.
- Business and Economic Environment
Another important factor is to understand the business and economic environment, in which the investor will be investing, as the policies of the government, its trade relations, the economic environment of the country, as well as strict/lenient regulations will also define how the stocks will perform in the future. As currently in the United Kingdom, the Brexit scenario has affected a lot of businesses, because investors are still not confident regarding how these companies will perform, post- Brexit, because a lot of their business is with other European countries, or they will have to operate in other countries, which may result in loss of revenues in the longer run. This also affects the companies’ ability to trade as a lot of them on the London Stock Exchange reported that their trade remained low as compared to the previous year, primarily because of the customers not spending on their products in the third and fourth quarter of 2019. Another factor is the volume and nature of government support for conventional innovations, research, and projects unreasonably high for individual firms or with payoffs excessively far later on or too unsure to even think about attracting private capital.
- Investment Strategy of the Individual
One of the other important factors is the individual’s personal investment strategy. This strategy could be aggressive or defensive depending on the financial goals and risk appetite of the individual. An aggressive investor would likely be less risk-averse in their portfolio allocation and could bank upon really risky assets, which have a capability of providing high returns in a short span of time. This type of portfolio investment would mostly include stocks, especially high growth stocks. On the other hand, a defensive investor would be highly risk-averse, and would rather prefer investing mostly in extremely safe assets such as the UK Government 10 Year Bond, which would give them a safety net of regular income and less to no downside chances. This would also include stocks that provide regular dividends and the ones which have been consistent in terms of their earnings in the longer term, even if there has not been a lot of growth. This mostly includes of stock which has been trading consistently on the best indexes for a longer time and has been consistent both in terms of the performance of their management as well as their financial performance.
Steps to achieve a balanced portfolio in terms of Footsie Stocks
- Look for undervalued stocks
The first point in the checklist of creating a perfect portfolio of footsie stocks is to identify undervalued stocks at the right time. One of the focal points is that the market misprices stocks every once in a while. There are numerous potential reasons why a stock can become undervalued, a couple of the more typical ones are:
- Missed anticipations: If a stock report quarterly earnings that miss the mark concerning expectations of experts and analysts, stock prices can drop more than the circumstance calls for.
- Market drops: If the entire market crashes or is on a downfall, it's a good time to seek stocks that are undervalued.
- Bad news: Just like when a stock misses analysts’ expectation, a piece of terrible news can also cause an automatic reaction, sending shares down more than they should with the news.
- Business Cycle Changes: Certain industries, in general, will perform better at various phases of their business cycles. Individuals that are out of support are great spots to search for stocks.
Diversification is basically distributing your assets in such a way that the exposure to a single type of asset is limited, hence also reducing the exposure to any downturns that a single type of asset might be subject to. A balanced portfolio generally consists of Domestic Stocks, Government as well as Corporate Bonds, other Short term investments, Sector and commodity focused funds, real estate assets as well as international stocks. Even while investing in Domestic Footsie stocks, the investors should spread their exposure around different industries and sectors, different type of businesses, and invest in stocks listed on different indexes such as FTSE 100, FTSE 250, Alternative Investment Market (AIM), and should look for different opportunities from these equities such as Capability of high Growth and provision of dividends among other factors. Most Value investors tend to invest with this philosophy which was adopted by Mr. Warren Buffet to Mr. Benjamin Graham.
- Quantitative Analysis
It is important to understand the importance of conducting quantitative analysis in order to ascertain in which direction would the stock move, and if it has the potential to grow further. Some of the metrics that are used to understand if these stocks are undervalued or not are Price to Earnings Ratio, Price to Book Value Ratio, Price to Earnings to Growth Ratio, Return on Equity, Debt to Equity Ratio as well as the Current Ratio to estimate the company’s ability to pay off its short term obligations.
Once after the stock’s portfolio has been created, it is also important to keep reviewing the portfolio and rebalancing the weight of each stock within the portfolio. It is important to keep a note of the fact as to which securities have become overweight and are not expected to provide any further returns and which stocks are still undervalued. In case of an overvalued stock, the stock should be primarily kept under watch and that its weight on the portfolio should be reduced, while the undervalued stocks should make up for an increased portion of the portfolio. It is also important to remove any nonperforming stocks from the portfolio and look again for other stocks on the FTSE, that can provide returns in line with the financial goals of the investor.
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