Take a "perfect" theoretical approach to your investment portfolio.
If you're reading this article, the likelihood is that you take much more direct personal interest in your investments than the bulk of the population. In fact many Fools manage their entire investment portfolio directly.
If you count yourself among this number, as I do, then it's necessary from time to time to step back and take a helicopter view of your investments and how they're going to contribute to your life -- in what manner and what stages.
Your Perfect Portfolio
Personally, I've found the tool of constructing my "Platonic" portfolio ideal on paper to be extremely helpful in this regard. It helps temper my overall judgement and assists me in the constant struggle not to get drawn into too many small, high-risk investments and a general over-reliance on individual company shares and sectors.
Of course, there is no "one size fits all" perfect portfolio. Each person has to decide for his/herself what their perfect portfolio would look like on paper depending on their age, employment status, equity in the property in which they live, the desire for income or capital growth -- and a whole host of other factors.
Nevertheless, there are some basic steps you may wish to take in devising your perfect portfolio on a blank sheet of paper.
Deciding on your acceptable risk profile, having taken into account all the factors only you can, is a logical starting point in my opinion. But tread carefully here. Markets have been extremely buoyant of late and you may have a more benign view than you would, say, this time two years ago when cash was at the top of many non contrarianly-minded investors' lists.
The risk table
Below is a rough risk table I constructed for my own purposes, moving from low-risk at 1 to high risk at 10:
1. Cash and gilts
2. Corporate bond funds, investment property
3. Corporate bonds
4. Unit trusts, exchange traded funds
5. Investment trusts
6. Large cap shares
7. Mid cap shares
8. Small cap shares
9. AIM / very small cap shares, covered warrants
10. Warrants, CFDs, spread-bets
The table is, admittedly, a simplified view of things. There are many potential investments missing and any such approach will always be fraught with anomalies.
Various collective investments have inherently different risk profiles in reality. And the list makes no distinction in share selection, of course, which is absolutely crucial for many value-hunting Fools. So, for example, a small profitable AIM stock whose valuation is well covered by cash and property shouldn't really be accorded the same "9" risk rating as a cash-strapped African gold miner whose valuation is flying on a wing and a prayer.
Similarly, a high-yielding blue-chip stalwart at level 6 or 7, is a very different prospect from an equally-sized oil explorer or techie etc.
But as a rough guide the table is helpful in helping you decide what proportion of investments you would ideally have in which categories and constructing your investments accordingly.
Don't forget sectors and world regions
Of course the other big considerations are sectors and international exposure.
Cross-referencing your ideal paper portfolio average scores against desired exposure to sectors and continents is essential in my opinion. Again, this is a matter for personal judgement, but bear in mind how much exposure you desire in which sectors.
For most people, an overall weighted mean average score in the 3-7 type range is probably ideal if it is achieved via a mix of investments, depending on age, employment, and a host of other individual factors.
Doing this exercise is worthwhile and you may surprise yourself if you take everything into account such as equity in property and pensions. There's often a huge difference between what people desire their overall risk profile to be and the reality.
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