An effective investment portfolio is key for managing market risk and meeting financial goals, including including initial public offerings in your strategy. Here's how IPO stocks can fit in.
Investment in pre-IPO shares offers the potential of significant returns. To increase your chances of success, research the underlying business and its future growth plans before making your decision.
Spread Your Investments
When building your portfolio, it is key to diversify across various investment vehicles in order to reduce risk and prevent major financial loss if one type of investment performs badly.
Stocks tend to be more volatile than bonds yet have the potential for much faster growth. To minimize risk and build an optimal portfolio, it would be wise to include both. Diversifying your portfolio by investing in different industry sectors - such as technology, consumer goods and healthcare - will help manage risk if one sector experiences major downturn while offering opportunities for growth elsewhere.
Keep your portfolio rebalanced regularly to stay in line with its original asset allocation mix and avoid market movements causing it to drift from where you intended. Rebalancing will enable you to sell investments that have grown too large while investing into other asset classes in line with long-term financial goals.
Allocate Your Investments
Your asset allocation - how you invest across stocks, bonds, cash or money market securities -- will affect both its rate of growth and risk level as well as your personal financial goals.
As an example, pre-IPO shares offer an attractive opportunity to take a concentrated bet on one particular company in hopes of seeing substantial returns in return. Such strategies require a detailed knowledge of its trajectory, markets and potential.
Once your asset allocation has been determined, it's essential to rebalance it periodically. For example, if the stock market has caused your stocks' value to soar that they now represent more of your portfolio than expected compared with your original asset allocation, then selling some stocks or purchasing investments from different asset classes in order to rebalance back toward meeting your objectives is necessary to bring everything back in line with them.
Diversify Your Assets
Stocks present the chance of substantial gains yet can also be more volatile than other investments. When building your portfolio, take into account your individual capacity and risk tolerance before allocating accordingly.
Diversify your exposure by investing in stocks from different companies, sectors and geographies. Within asset classes you can further diversify by allocating growth-focused stocks alongside value stocks to capture opportunities throughout the market cycle. Furthermore, including fixed income securities like bonds can help lower overall volatility by diversifying your investment mix.
Diversifying can be made simpler through investments in index funds or exchange-traded funds (ETFs). ETFs provide an easy way to gain broad exposure without investing directly into individual investments, while regular rebalancing ensures it aligns with your capacity and risk tolerance. Sharesight's diversity report allows you to monitor and analyse the asset allocation of your portfolio across markets, currencies, sectors, industries or custom attributes of your choice.
Rebalance Your Investments
Rebalancing is an essential process to help ensure that your portfolio stays in line with its original asset allocation. Rebalancing involves selling investments that have performed exceptionally well while purchasing more of those which are underweighted within it.
As markets fluctuate, it can be easy for your portfolio to deviate from its desired asset allocation. For instance, if you are saving for retirement several decades from now, your stock portfolio could become unbalanced by including too much risky stocks compared to bonds - increasing risk and leading to potential costly losses.
An effective investment strategy involves regularly rebalancing your account - such as monthly or quarterly - to keep its original asset allocation. Rebalancing tax-advantaged accounts like IRAs and 401(k)s reduces transaction costs and taxes while providing a natural opportunity to assess financial goals, risk tolerance, and make necessary changes as part of a regular rebalancing schedule.