22 December 2023

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Building an Investment Portfolio

Luigi Campopiano

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When it comes to investments, every strategy should be formulated based on individual circumstances. Savers with similar goals may choose different financial portfolios for a variety of reasons. How can one construct a portfolio that truly reflects their needs? Especially among less experienced savers, doubts and perplexities about building their investment portfolio (the collection of financial instruments owned by the investor) may arise. So, how is it built? There is no one-size-fits-all answer because there are many available methods. However, some steps and guidelines can be outlined in the initial stages of the process. Here are some questions to help narrow down the scope:

• What is my investment goal (capital growth, regular income, etc.)?
• What is my investment time horizon (short-medium-long term)?
• What is the level of risk I can tolerate (low-medium-high)?

Each saver dedicated to investment will need to provide a different answer based on their specific needs. There cannot be a portfolio that is valid for everyone and all goals. Therefore, it is important to build a personalized asset allocation that respects one's financial profile. This involves deciding how to distribute the portfolio among various "investment options" offered by different asset classes (liquidity, stocks, bonds, etc.), identifying the most useful formula to achieve a risk/return ratio in line with personal needs.

Once the asset allocation has been identified (representing the framework within which to operate and from which the majority of achievable returns typically derive), the next step is to evaluate the investable universe, i.e., the asset classes in which to invest. To do this, it is necessary for the saver to be well-informed about the instruments through which to invest and to be assisted by a professional.

Each instrument has different risk, cost, liquidity, and expected return characteristics. Knowing these differences is essential for choosing the solution that aligns with one's needs. Many investors prefer to combine different types of instruments, aiming for diversification and risk containment. At this point, each selected instrument can be assigned the appropriate weight within the portfolio, guided by personal risk tolerance, the predetermined investment time horizon, and investment goals.

The process for constructing an investment portfolio can be summarized in 3 steps:

• Define the reference perimeter (asset allocation).
• Identify the investable universe (asset class).
• Choose the most suitable instruments for investment.

It is the responsibility of each saver to interpret these steps as best as possible, by thoroughly researching and seeking all the necessary advice to make informed choices. A portfolio is most efficient when it is tailored to the investor's needs. It is essential to monitor the performance of investments. Savers would do well not to make hasty or emotional decisions but should review their choices in case of radical changes in their lives. Even better if supported by a professional in the field.