There are different ways to approach your portfolio and managementstrategies. Here’s what you need to learn about a passive portfolio.
Active Management
Active management is a technique based on some type of
information the advisor or investor thinks gives them an advantage in their
investment holdings. They might even use some type of fundamental analysis based
on corporate earnings, growth projections, economic conditions, and others.
They can also use a form of technical analysis that lets them
depend on the price movements of an investment to come up with a decision. This
type of analysis usually involves some form of charting or another.
Passive Management
Passive management strategies don’t really try to forecast
which investments are going to do well and which ones are not. Passive investing
portfolios are created using a globally diversified mix of low-cost funds that
are based on the investor’s risk tolerance and needs, which is technique known
as asset allocation. The combination of many stocks and bonds offer broad
exposure to many asset classes.
Passive Portfolio
Passive portfolios usually have stocks and bonds. For the
stock side, you can find:
- The biggest publicly-traded US companies to the smallest, not only the Dow 30 or the S&P 500
- Large and small companies across the developed countries including Europe and Australia.
- Large and small companies from the emerging markets around the world. Bear in mind that these stocks are very volatile, so it’s best to limit exposure to them.
- Real estate companies that get their income from rental properties.
On the bond side, you can usually see:
- Government and high quality corporate bonds maturing in three years or less
- Intermediate term, high quality bonds, similar to short-term exposure bonds, but these mature in three to 10 years
- Treasury inflation-protected securities.
Diversification
The goal of diversification of portfolio is to decrease the
overall risk by spreading the investment dollars across asset classes that are “non-correlated.”
Stocks move differently from bonds, and international stocks move differently
from US companies.
It’s important that a well-diversified portfolio will not
get all the gains when the market is rising, but it also won’t suffer the
extreme losses when things go south. Your specific asset allocation should be
based on various factors.
You will want to consider your cash needs, time horizon, risk tolerance, risk capacity, and need for risk. a person with an aggressive portfolio
usually put more stocks than bonds in their portfolio, while more conservative investors
favor more bonds than stocks.
Rebalancing for diversification
After building a portfolio, a well-diversified one, you shouldn’t just leave it alone forever. After you are invested, you need to ensure that the portfolio stays in balance. With the movements of asset classes comes the duty to make sure that your mix stays the same.
A disciplined rebalancing strategy will bring the mix back to your original allocation by selling some stocks when their price is higher and
buying some bonds when their price is lower. The investment adventure is
supposed to be about buying low and selling high, after all.
No one can really predict the market. Rather than attempting
to do that, you can just focus on controlling what you can actually control.
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