The Optimal Investment Portfolio to ensure the best returns

The optimal investment portfolio is not an absolute concept, but rather a relative one. Therefore, it is difficult to define a general, unified model that defines its characteristics from the perspective of all investors. An investment portfolio is a group of investments in certain financial assets (according to the investor’s strategy) that will provide maximum profitability with minimal risk.

The primary goal of an investment portfolio is to reduce risk and maximize returns through what’s known as “diversification.” However, this doesn’t mean you need to fill your portfolio with an endless array of financial assets (stocks, bonds, commodities, mutual funds, and exchange-traded funds). Excessive diversification does more harm than good. In the following lines, we’ll explain whether you’re applying diversification correctly or whether you’re actually making matters worse.

4 rules for building and managing the optimal investment portfolio

A common obstacle to building and managing an investment portfolio according to a specific strategy is that many investors are unable to resist investing in every new investment that seems promising. To help you determine whether your investment portfolio represents sound diversification or irresponsible diversification, you should answer the following four questions:

1. Do you have investments that you don’t really understand?

I don’t mean that you understand it in general terms, like, “Yes, it’s a leveraged ETF that gives you double the return of the S&P 500” or “I own a diversified annuity that gives me a guaranteed 7% return per year.” I’m talking about understanding how that leveraged return is calculated (because it has major implications for the return it will provide) and what exactly that guaranteed 7% applies to. If you don’t understand how an investment actually works, you won’t know whether you really need it or not.

2. Can you explain exactly why you bought each investment you own?

Mentioning the investment on a TV investment show or appearing on a magazine’s top 10 list is not an acceptable answer. You need to not only know how the investment works, but also understand the specific role it plays in your portfolio and exactly how it improves portfolio performance. You should be able to quantify the benefits you will gain from this investment, citing research or performance figures that demonstrate how it will enhance the balance between risk and return.

3. Do you have investments that you never touched after purchasing them?

If you follow a long-term investment strategy, an asset mix of 50% large-cap stocks, 10% small-cap stocks, and 40% bonds will reflect your investment goals and risk tolerance. Different investments generate different returns, so you should rebalance your portfolio periodically. To achieve this, consider the following tips:

• Review your original investment strategy by reviewing the original goals you set for yourself in terms of the distribution of companies in your investment portfolio according to the business sector, geographical distribution, and the desired risk ratio in your portfolio.
• Sell ​​shares in a sector or type of company that has now exceeded its target and reinvest the money in other areas that have not met their target.
• Reinvest the returns from a sector or type of company where you achieved your profit goals into other investments that did not achieve their goal.
• Invest new money in a sector or type of company that has not yet achieved its goal.
• Keep in mind that there are costs to all investment methods; you may have to pay brokerage fees to buy or sell stocks.
• Carefully consider the costs versus the benefits of balancing your portfolio.
• Selling stocks that have appreciated in value may result in higher taxes on your gains. In this case, it may be better to invest new money—if any—in your investment portfolio.

4. Do you add new investments to your portfolio regularly?

If the answer is yes, you’re probably making matters worse. Your investment building mission is almost complete after you’ve created a balanced portfolio. You should, of course, monitor and rebalance the portfolio, and perhaps even discard a failing investment and replace it with a new, better version of the same one (a situation you could largely avoid if you stuck with index funds). But you don’t need to constantly add new asset classes or investments just because investment companies keep introducing them. If you do, you’ll end up with an unwieldy, difficult-to-manage portfolio, rather than a simple portfolio that effectively balances risk and return.

These were 4 simple rules that will help you build a successful investment portfolio, and avoid the confusion that prevents you from achieving your investment goals.

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