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Developing a Portfolio Style


Developing a Portfolio StyleLike developing your personal style, developing your investment style takes time and planning. The first place to start is:

  • Setting realistic performance targets. This means setting an expectation of return on investment that then allows us to track our investing success.
    As with fashioning our personal style, it is important to be realistic about three main factors in the planning stage: the time we want to spend on our investments, the base we have to start with, and what we want to achieve.  When setting a performance target for the first time, my suggestion is not to set your expectations too high for example  8-10%. Instead increase your performance rate steadily over time. In today’s current environment, achieving 12-15% is pretty good.
  • Keep your portfolio to a maximum of 15 stocks. Unlike shoes, it is counterproductive to have too many investments. If you have a smaller amount of money to invest in the initial stages of your investment career, I would recommend starting with 3 stocks.  When you are ready to grow your portfolio, my advice is to add a new stock with every additional $5,000-$10,000 you want to invest.
  • Diversification is paramount to assist with risk mitigation and exposure to market fluctuations. You can diversify your portfolio across different share types for example income and growth, or sectors for example, mining, finance and media. Your portfolio might also include assets, such as property, shares and cash.

When deciding what Investment Style suits you, it is important to consider how involved you wish to be. This is largely determined by your set goals and objectives and the time you have to allocate to your investments. On the whole, financial advisors distinguish investment styles into two main categories:

  1. Passive Investing – an investment strategy that requires little ongoing buying and selling actions. Passive investors will purchase investments with the intention of long-term appreciation and limited maintenance.
  2. Active Investing – an investment strategy involving ongoing buying and selling actions by the investor. This style can be compared to the fashion trendsetters of the world, who change their outfit to fit the season or the occasion. An active investor adapts his/her investments to meet their current needs, usually determined by factors such as work, age, or  circumstance.

Active investors are highly involved. Unlike passive investors, who invest in a stock for its potential for long-term appreciation, active investors will typically look at the price movements of their stocks many times a day. Typically, active investors are seeking short-term profits.

Classical Style, which is also known as a Buy-and-Hold Strategy, is practiced by passive investors (or couch-potato investors). When buying and holding, the investor usually ignores the day-to-day and often month-to-month fluctuations in the stock price. The investor lets his or her money increase with the growth of the overall market, which they believe will increase consistently over the long term.

It’s also important to remember that a buy-and-hold strategy works best when you’ve the time to do in depth research to ensure that you buy shares in a high-quality company.

Mix’n Match Style, which is also known as Tactical Asset Allocation, is a moderately active management strategy. It rebalances the percentage of assets held in various categories in order to take advantage of market pricing anomalies or strong market sectors.

This strategy allows investors to create extra value by taking advantage of certain situations in the marketplace. It is as a moderately active strategy with managers returning to the portfolio’s original strategic asset mix when desired short-term profits are achieved.

Staying on Trend or Dynamic Strategy is a portfolio management strategy that involves rebalancing a portfolio to bring the asset mix back to its long-term target. Such rebalancing would generally involve reducing positions in the best-performing asset class, while adding to positions in underperforming assets. The general premise of dynamic asset allocation is to reduce the fluctuation risks and achieve returns that exceed the target benchmark.

Asset allocation can be an active process to varying degrees or strictly passive in nature. Whether an investor chooses a precise asset allocation strategy or a combination of different strategies is dependent on a number of factors including: the investor’s goals, age, market expectations, and risk tolerance.

Keep in mind, however, that this article gives only general guidelines on how investors may use asset allocation as a part of their core strategy. Be aware that allocation approaches that involve anticipating and reacting to market movements require a great deal of expertise, and talent in the use of particular tools used to anticipate the timing of these movements. Some would say that accurately timing the market is next to impossible, so make sure your strategy isn’t too vulnerable to unforeseeable errors.