Many investors are looking for a long-term investment opportunities that would be optimal to their required returns and of acceptable risk levels. Selecting suitable assets, implementing an investment strategy and constructing an optimal portfolio however may be a difficult task. Certainly, every investor has their own tailored approach to this process but there are some general aspects of portfolio planning you may consider.
(NOTE: Before we continue, we have to give a disclaimer that the trading products offered by the companies listed on this website carry a high level of risk and can result in the loss of all your funds. CFDs are complicated instruments that are never guaranteed to provide you supplemental earnings. In fact, Around 67% of all retail investors experienced a loss while trading CFDs. Make sure to keep this in mind before attempting to use the eToro platform yourself. All the information found on this website is not official trading advice and all practices shown are referenced for the use of the Demo account only.)
Establish a Risk-Return profile
The first and perhaps the most basic step in portfolio planning that is often overlooked is establishing your risk and return profile, as well as deciding on the goals and objectives of your investment. This would then affect the choice of assets to be held in your portfolio, the kind of allocation you choose as well as the investment strategy such as for example, buy-and-hold, dollar cost averaging, dividend growth etc. It may also be a good idea to also determine a benchmark to track portfolio performance once you have decided on the acceptable levels of risk and return as well as its composition. This could be a broad market index such as the S&P500 if you are investing into a wide variety of different stocks, but you might also consider a benchmark that matches your investment style and the asset classes you are considering. Tracking and comparing performance would also allow to make small adjustments to the portfolio on the way of your progress.
Asset Selection and Allocation
Asset allocation refers to the relative proportions of your total portfolio that are invested into various asset classes, for example one might invest 50% of their holdings into equity and the other half in ETFs or commodities. Asset allocation is based on investors risk-return balance. You can always see your current asset allocation in a convenient pie-chart form under the ‘Portfolio’ tab. It demonstrates how much of your total holdings is invested into each asset class.
eToro offers hundreds of assets under multiple asset categories, such as equity (stocks), ETFs commodities, cryptoassets, indices and currencies. Combining various assets does not only help to achieve the desired levels or risks and return but also helps in portfolio diversification. There are various approaches to asset allocation and portfolio re-balancing, here are some of them:
- Constant weight: this is one of the simplest techniques of asset allocation for a portfolio where the total proportion is split into different assets on a constant percentage basis, for example with a third invested into equity, another third into commodities and the last third into indices. In case one of the asset classes increases or decreases in value over time and starts to represent a larger portion of the total portfolio than determined by the original allocation an investor might consider re-balancing it. The original mix of asset of course depends on the risks you are willing to take as certain asset classes, stocks for example, may be relatively more volatile than others. This allocation technique is however quite rigid and may lead to overlook potentially profitable opportunities.
- Dynamic allocation: is the opposite of the passive constant weight allocation. Under this strategy the mix of assets is constantly adjusted with the sale of assets that decline in value and purchase of those that appreciate.
- Tactical allocation: is a kind of an intermediary between the constant and dynamic allocation styles where although a master mix of assets is established an investor might engage in short-term tactical deviations from it to take advantage of emerging opportunities.
These are all of course just examples of allocation techniques and often time a combination of passive and active allocation can be considered to control for desired risk levels and yet allow for potentially profitable opportunities.
Choosing and investment strategies
There are many different investment strategies you could implement on eToro. Passive strategies involve things like buy-and-hold strategy, where a certain selection of assets is purchased and held until the maturity, dollar cost averaging, that involves periodic purchase of additional assets for your portfolio, dividend investing and so on. While strategy relates to the actual process of investing, investing style would help you choose the type of assets you are investing into.
Here are some of the most general investment styles:
- Value investing. Value investing involves investing into assets that are priced too cheaply on the market compared to their intrinsic value and is based on fundamental analysis of a company’s stock. An investor analyzes financial performance of a firm to determine a potential value it may deliver over time. eToro makes this process convenient by providing a short summary on financial performance of a company, with financial statements and key statistics.
- Growth Stocks. This strategy involves investing into companies with high earnings growth. These may increase in value over time by re-investing their cash rather than paying it out in form of dividends.
- Momentum strategy. Momentum strategy is one of the most basic investment strategy that relies on the premise that groups of well performing stocks (winner portfolios) will continue to do well in the future while looser portfolios of poorly performing assets will keep on loosing value.
Choose your risk management techniques
There are several types of portfolio risk management techniques you could implement on your eToro portfolio.
- Diversification refers to the reduction of portfolio risk by the inclusion of various uncorrelated assets. It is based on the idea that different assets will react differently to different market, industry-specific and company events. For example, if you invest into the technology sector and it suddenly declines in value, the part of your portfolio invested into another sector, medical for example, could compensate for these losses (these industries are chosen purely for an exemplary purpose). Diversification however does not necessarily needs to be achieved by investing into many different assets but also by adding in various indices or ETFs available on eToro that are themselves made up of many assets and can offer a broad market exposure.
- eToro risk management tools. eToro platform offers several tools of risk management you might consider, something as basic even as setting levels of stop-loss and take profit. eToro also offers something called a risk score under your statistics which takes a value between 0 and 10 and is mostly based on the volatility of assets traded
- Other techniques. Other techniques of risk management include things like controlling for the trade size or the amount invested into each position, hedging by investing into more than one asset class and so on.
Monitoring, assessing and re-balancing
Constructing and implementing a portfolio is only the first step of the process. It is equally important to monitor, assess and adjust your investments regularly. ‘Stats‘ page of your profile may help to regularly assess your risk levels, returns on a monthly basis, the extent to which each position is profitable (in percentage terms) and so on.
This helps to not only track your performance and adjust accordingly, but could also act as a risk management tool and spot issues in a timely manner.
Those investors who are struggling to assemble a portfolio themselves can consider eToro CopyPortfolio option available on eToro. These are ready-made, managed and frequently re-balanced thematic portfolios. Please remember that past performance of these portfolios is not an indication of future results as any investing and trading involves capital loss risks.
Hopefully now you have a better idea on the possible steps to take to construct your eToro portfolio. Please bear in mind that the above guidelines are not an investment advice but purely an indication of some general practices on the market. Every investor has their own investment strategy and approach that best suits their needs, objectives and risk tolerance. Remember that investing involves capital loss risks and enjoy using eToro platform. Best of luck!
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eToro is a multi-asset platform which offers both investing in stocks and cryptoassets, as well as trading CFDs.
Please note that CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 67% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.
Past performance is not an indication of future results.
eToro USA LLC does not offer CFDs and makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication, which has been prepared by our partner utilizing publicly available non-entity specific information about eToro.
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