5 Key Strategies for Building Investment Portfolios

Between basic investment principles like diversification and riskier methods such as the “Barbell Strategy”, we cover the basics of portfolio building.

Sep 19, 2023 | By Florence Sutton
toy man reading atop a stack of gold coins
Photo: Mathieu Stern

Building resilience in one’s portfolio is crucial in the investment world as events of years past have shown us, such as the 2008 subprime mortgage crisis and the COVID-19 pandemic.

Investors must fortify their portfolios against the fickleness of markets as affected by geopolitical tensions and economic uncertainty. Bear markets and economic downturns are opportunities to rethink one’s investment strategy. You must evaluate your strategy based on economic factors balanced by your financial goals and risk tolerance.

Warren Buffet once quipped that the stock market is a vehicle that transfers money from the impatient to the patient. By extension, a well-built investment portfolio takes advantage of opportunities, giving the strategic an edge over the impulsive. 

A well-balanced portfolio protects you from adverse financial circumstances and is an opportunity for financial gain. 

Top Strategies for Building Investment Portfolios

Today, perspectives on investment and personal finance have genuinely changed. People understand how the world—and, therefore, markets—can shift instantly and drastically.

Even with such insights, there is nothing new under the sun. We can look back at financial and economic events and learn from them. 

Following a tumultuous 2022, the macroeconomic landscape of 2023 is fraught with uncertainty. Organizations, including the International Monetary Fund (IMF), Organization for Economic Cooperation and Development (OECD), and the World Bank, predicted sluggish growth in the US. Furthermore, the Eurozone has been expected to experience a shallow recession. Both the US and EU were expected to have high inflation through 2023. While inflation concerns are currently easing, central banks remain vigilant over inflation. Geopolitical tensions remain a concern as well. The pandemic has dealt the world an unexpected hand and has disrupted the world economy. We are still feeling the aftershocks of that unforeseen crisis on multiple fronts. 

Photo: Towfiqu Barbhuiya
Photo: Towfiqu Barbhuiya

There are proven ways to ensure a resilient portfolio in the post-pandemic world, involving abiding by strategy instead of intuition, thus avoiding the “irrationality of markets.” Given that average investors typically earn below-average returns, we should all avoid the common pitfalls of greed during bull markets and behavioral biases that keep us from identifying opportunities during bear markets. 

Instead of trying to predict events and timing the market, think about how to make the most of your time in the market. Apart from just opening savings accounts, you can invest in other assets that have long-term growth potential and can provide you with liquidity throughout your lifetime, weathering changing market conditions. 

The following are expert tips on how to build a resilient portfolio that resists the short-term irrationality of markets.

1. Diversify: Make Use of Multiple Asset Classes

Diversification is a way to manage risk by mixing various investments and asset types within a portfolio. It is the cornerstone of strong portfolio construction. It helps you withstand the unpredictability of financial markets. 

Ray Dalio, an advocate of diversification, says there is no free lunch in finance. While not everyone will agree with him, he represents the school of thought that a well-diversified portfolio mitigates risk and protects against sector-specific market shocks. 

When you spread your portfolio across asset classes, regions or industries, you reduce the impact of any single event or market downturn on your portfolio. Beyond savings accounts, you can invest in an IRA which should give you reliable results that support your long-term goals.

ETFs, or exchange-traded funds, are excellent products to add to your portfolio because they tend to provide reliable results over time. Real estate is also a sound long-term investment with lower risk than volatile stocks and small-cap investments. 

Conservative investors who are more risk-averse yet want to add equities to their portfolios can evaluate stocks based on past performance. A well-diversified portfolio with excellent risk management would be spread out among an aggressive portion such as domestic and international stocks and investments that provide regular interest income. Moreover, it would have an allocation for commodity-focused funds such as those focused on oil and gas, agriculture, precious metals, sector funds and real estate funds.

2. Zoom in on Fundamentals

When picking investments such as stocks, prioritize quality over quantity. Warren Buffet comes from the school of value investing and believes in searching for companies with a “moat.” He believes that competitive advantages confer companies with endurance.

Value investing is a strategy that involves choosing high-quality companies or picking stocks that look like they are trading for less than their intrinsic or book value. In other words, value investors can pick stocks they believe are underestimated by the stock market. As markets typically overreact to good and bad news, stock price movements do not necessarily correspond to a stock or company’s actual value and long-term fundamentals. 

Overreaction provides an opportunity to profit from buying the right stock. Budding investors must learn to read balance sheets correctly to look for companies with consistent earnings and thus, fixed-income opportunities in US stock markets. Moreover, new investors should also learn to evaluate companies’ competitive advantages that suit them for weathering downturns.

If safety is your priority, look for fixed-income investment products. In summary, choose companies with steadily growing revenue, lower cyclicality or a need for more sensitivity to economic cycles, dividend growth and durable competitive advantages.

3. Hedge to Manage Risk

Hedging is a risk management strategy where you insure against adverse events affecting your finances. You hedge to offset investment losses by taking an opposite position in a related asset. When hedging, you must pay for the downside protection, the premium. 

Derivatives such as options and futures are common hedging strategies to protect portfolios against downside risk. While options and futures require a more sophisticated understanding of market investment, learning about them is worthwhile. They offer crucial extra security in times of volatility.

George Soros, a master of markets, once remarked that it’s not about being right or wrong. Instead, the game is about how much money you make when you make the right call and how much (or little) you lose when you make the wrong one.

As you hedge, remember to rebalance and reevaluate your portfolio regularly. Portfolio rebalancing allows you to adjust your investments amid changes in the investment climate. 

4. Harness The Power of Passive Income

When building a portfolio, you need to think about passive income. Dividends are a great way to protect your passive income stream. Dividend-paying stocks, in particular, are a valuable component of a balanced portfolio. 

When evaluating company stocks, you need to look into revenue, rate of customer acquisition, level of user engagement and customer retention. You also need to learn about defensive stocks. A defensive stock is one that has been proven to generate consistent dividends regardless of fluctuations in the stock market. 

Moreover, defensive stocks reflect the companies’ nature — they provide a product with consistent demand. They tend to fall under specific industries such as utilities, telecommunications, healthcare, real estate and consumer staples. Thus, they tend to be stable amid the ebbs and flows of business cycles. 

Revered value investor and author Benjamin Graham once said that a defensive investor focuses on the shares of companies with a long record of profitability. Defensive stocks occupy a unique niche in investing because they make sense in different economic scenarios. Anyone concerned about the market may want to tilt their portfolio defensively. Still, it’s best to work with a financial advisor when making the final decision. 

5. The “Barbell Strategy”

There are ways to create resilience beyond conventional diversification. Those with a more aggressive or growth-oriented strategy can choose weightings and asset types that suit their risk profile and investment goals.

The “barbell strategy” is one innovative strategy designed for challenging times. This strategy aims to capture better returns by riding on long-term irreversible growth trends. Moreover, the barbell strategy can provide a stable income stream to buffer market short-term volatility. This concept proposes that the ideal way to balance risk and reward is to invest in extremes of risk, in high-risk and no-risk assets and nothing in between. It avoids the conventional middle-of-the-road choices.

Envision a barbell: you take an outsized position in two significant focus areas. For the first component, you can choose investment-grade bonds that yield more than five percent. As the other component, you can select a “growth booster” type of play by identifying pillars of the digital economy.

Bitcoin (BTCUSD) price chart from TradingView as of May 23, 2020.
Photo: Nick Chong

Some experts believe that the barbell strategy makes sense in today’s environment because it takes advantage of significant sectors driving overall trends and playing a major role in global economic growth. Some sectors are facing structural headwinds, such as retail and communications. By buying into the leaders of the continually dynamic digital economy, you will likely be on the growth side. 

Bond investors who don’t want to invest too much capital in long-term bonds may benefit from the barbell strategy. You can have cash handy for investing in new bonds by allocating a portion to short-term bonds. When rates fall, money is locked in the higher rates in long-term bond investments.

Cryptocurrency and e-commerce are investment niches that have experienced remarkable growth over the last decade, although they have unique risks. Cryptocurrency can also be incredibly volatile and is considered to be a high-risk asset class. Bitcoin, in particular, has historically delivered higher returns than conventional assets and other crypto investments, but has also been shown to be highly volatile. 

Embrace Resilience by Protecting Against Volatility

The cardinal rule of investing is to protect your principal. Although not the only end goal, this conservative approach is the overarching principle behind diversification and other investment strategies. 

Capital preservation is achieved by diversifying your portfolio and choosing non-correlated assets to balance each other. There are many ways to protect against volatility, such as hedging and diversification. Apart from protecting capital, more aggressive investors can set themselves up for growth by focusing on a balance of reliable or stable investments and high-growth sectors showing significant potential over the coming years or decades. 

Always customise your portfolio according to your investment objectives, unique financial situation, desired investment returns, level of risk appetite and time horizon. Evaluate and rebalance your portfolio periodically. Moreover, when making investment decisions, seek investment advice from qualified experts or a reliable brokerage.

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