Steps to build a profitable investment portfolio and how to choose an investment equity correctly in 4 steps

Investment Strategy


Creating an investment portfolio on sound bases is central to the success of any investor in the capital market today. As an individual investor, you must learn to divide your assets in a manner consistent with your investment goals and your ability to take risks. In other words, your portfolio must achieve the maximum return on risk with minimal risk, and not cause you concern. 

In general, the formation of an investment portfolio aims to maximize wealth by increasing the benefit, in addition to reducing the size of the risks that the investor may compromise, but the problematic issue is how to determine the optimal composition or composition of the assets of the portfolio in accordance with the criteria of return and risk?

Successful investment portfolio in 4 steps

Investors can build portfolios that are compatible with specific investment strategies by following methodological approaches. Below we will give you four steps to help you build a profitable portfolio in a systematic way:


1. Determine the method of distributing the assets appropriate to your situation.

Verifying your financial position and goals is the first task in building an investment portfolio, and it includes the important elements that must be taken into account both age, the amount of time available for you to develop your investments, as well as the amount of capital that you will invest and future income needs. An unmarried university graduate who begins his career needs a different investment strategy than a 55-year-old who wants to pay for college education for his children and to save a reliable amount after he retires in just 10 years.

The second factor to consider is your personality and your ability to take risks. Would you like to risk losing some money for the possibility of greater returns? Everyone wants to achieve high returns year after year, but if you are constantly concerned about the fall in the value of your investments in a short period, the desired high returns will not deserve all that pressure and tension in such cases. 

Determining your current position clearly, your future needs for capital, and your ability to take risks will determine how your investments should be divided between different asset classes. The potential for greater returns comes at the expense of bearing the greater risk of risk (a principle known as risk/return trade-off) - the goal is not to completely avoid the risk factor but rather to use it to suit your circumstances and your investment style. For example, a young man who is not dependent on his investment for fixed income can take greater risks in his pursuit of higher returns. On the other hand, the person who is close to retirement age must focus on protecting his assets, obtaining income from these assets, and following investment plans characterized by fiscal advantages that guarantee the payment of the lowest taxes possible.

Conservative investors vs impulsive investors.

The more risk you can take, the more aggressive your portfolio will be, the greater part of your investment will be towards equity and the lower portion of fixed-income bonds and other securities. On the contrary, the less risk you can take, the more conservative your portfolio will be. Here are two examples of this: one for a conservative investor and one for a moderate impulse investor.

The conservative wallet

  • 70-75% fixed income securities.

  • 5-15% cash or equivalent

  • 15-20% shares.

The primary objective of the conservative portfolio is to protect its value, and the distribution pattern described above will result in stable income from bonds and will provide some potential for long-term capital growth from investing in high-quality stocks.


The wallet is relatively aggressive

  • 50-55% shares

  • 5-10% cash or equivalent

  • 35-40% fixed income securities

The relatively impulsive portfolio is suitable for medium-term risk tolerance and attracts those who can take more risk in their portfolios in order to achieve a balance between income and capital growth.


2. The stage of creating an investment portfolio

Once you have determined how to allocate the appropriate assets, you will need to divide your capital among the appropriate asset classes. On the initial level of distribution, it is not difficult. Stocks are stocks, and bonds are bonds.


You will be required to divide the underlying asset categories into subcategories with specific risk and return ratios. For example, an investor may distribute the equity-related class by creating a mix of companies and emerging markets to strike a balance between small firms with large growth potentials and companies with larger and more stable businesses, and between domestic and foreign stocks. The asset class of bonds can be distributed between short-term and long-term bonds, and between government and corporate debt, and so on.


There are several methods you can use to choose the assets and securities that fulfill your asset division strategy (you will need to analyze the quality and capabilities of every investment you buy, bonds and stocks are not equal).


  •  Stock selection - Choose stocks that achieve a level of risk that you can assume in the portion of stocks in your portfolio. The stock sector, market value, and type of stock are basic factors that you should consider. In the first stage, make an expanded list of potential companies and then filter them using stock sorting tools (programs that help filter stocks according to a wide range of criteria) to get a shortlist. In the second stage, you should perform an in-depth analysis of each potential stock to determine its future opportunities and risks. This is the stage that requires the bulk of the work when adding stock to your portfolio, and it requires you to monitor changes in the prices of your investments regularly, and follow the latest news of your stock companies in particular and sectors in general (for more information, read “4 steps to choose a stock”).

  •  Choice of bond - There are several factors that you must consider when choosing a bond, including the value of the voucher, the due date, the type of bond and its valuation, as well as the general interest rate environment.

  •  Mutual Funds - Mutual funds are available in a wide range of asset classes, and allow you to purchase stocks and bonds that fund managers have conducted professional research prior to selection. Fund managers will charge fees for their services, of course, which will reduce your returns. Index investment funds are another option, and their fees are lower because they reflect an existing index, and hence are managed inactive. 

Trading and investment opportunities:

ETFs - a good alternative if you do not want to invest in mutual funds. ETFs are essentially mutual funds that are traded like stocks. They are also similar to mutual funds because they represent a large equity basket - grouped by sector, size of capital, country, or the like. But they differ in that they are not actively managed, but rather follow a specific index or another stock basket. Since they are inactive, ETFs offer cost savings compared to mutual funds, while providing diversification. ETFs cover a wide range of asset classes as well and are useful in completing and diversifying your portfolio.


3. Revaluation of the portfolio.

After the portfolio is formed, it must be rebalanced periodically, as market movements may cause a change in the initial values of your investments. If you want to evaluate the actual distribution of assets in your portfolio, categorize the investments in quantitative terms to determine their value compared to the total investments.


Other factors that are likely to change over time include your current financial situation, your future needs, and your ability to take risks. If these factors change, you will have to adjust your portfolio according to the new changes. For example, if your risk tolerance decreases, you may need to reduce the number of shares in the portfolio. Or perhaps you are more willing to take risks, and therefore you may allocate a small percentage of your assets to the shares of small high-risk companies.


If you want to rebalance, determine which asset class has increased or has fallen below the threshold. For example, let's say you put 30% of your current assets investments in small or emerging companies (higher risk score), while you are supposed to allocate only 15% of your assets in this category. Rebalancing determines how much you need to reduce in this category to allocate it to other categories.


4. Rebalancing the portfolio in a strategic manner.

Try to maintain the distribution of the assets you chose in your investment strategy until you feel that the time has come, based on data on your age or your financial condition, to change this distribution. A requirement for continuing your current asset allocation strategy is that you have to rebalance your portfolio or redistribute it completely from time to time.


When you decide that this time is the right to rebalance your portfolio, there are several ways to do this:

  •  You can sell part of the type of investment asset whose value has increased significantly, and reinvest its profits in another asset that has not increased yet.

  •  You can change how new investment funds are added to the portfolio, by placing them in other types of assets whose prices are still below their fair values, until the investor reaches the distribution that suits him.

  •  You can raise the capital of the investment portfolio, and allocate the increase to fully invest in assets that are still below their fair values.

  • Use the method we discussed in step 2 to choose securities when creating an investment portfolio for the first time.

  •  Note that when you sell assets to rebalance your portfolio, this will have tax implications, which will reduce your returns. At the same time, you should think about the future of your investment. If you expect that the excess growth papers are close to collapse, selling them is necessary despite the tax implications. Analyst opinions and research reports are useful tools to help measure the future of your investments.

* Remember the importance of diversification


It is very important to remember the importance of diversification and the need to maintain it during the process of creating an entire investment portfolio. Not only is it sufficient to own securities in each asset class, but rather to diversify into each class as well. Ensure that your investments in a specific asset category are spread across a wide variety of sub-categories and sectors.

As mentioned earlier, investors can achieve excellent diversification by using mutual funds and ETFs. These investment vehicles allow individual investors to benefit from the economies of scale enjoyed by managers of large investment funds, which the average person will not be able to achieve with a small sum of money.

In general, an optimal diversification portfolio is the best opportunity for you to grow your investment over the long term. It protects your assets from risks of major downturns and structural changes in the economy over time. Monitor your investments closely, make adjustments as necessary, and increase your chances of achieving significant financial success in the long run.

How to choose a successful investment stock? Holding shares is like owning small parts in multiple companies and businesses. As the shareholding companies are obligated to disclose their financial statements and publish their reports periodically, as an investor you must start reading these reports before making the decision to buy any stock.

There is no single correct way for how to choose an investment stock, but there are fundamentals that help investors narrow the scope of the research before beginning reading the analysis of the financial reports for each company on the list.


Here are the four most important steps on the right path to becoming an investor with a high degree of investment culture and sophistication, who knows how to choose winners:


1. Determine the investment objectives.

The first step in choosing stocks is to set a portfolio goal. Investors who focus on the requirements of earning, maintaining capital or increasing capital will apply different investment criteria in each of them; Investors who focus on income usually choose low-growth companies in industries and sectors such as utilities, and there are also other alternatives such as REITs funds and major limited partnerships (MLP which is a type of business that exists in the form of a limited public trading partnership) and is readily available. Those with a low-risk tolerance, and primarily interested in capital preservation, tend to invest in stable big companies. Whereas, investors trying to increase their capital target companies with market values and varying stages of the life cycle.


2. Selection of companies:

The next stage in the stock selection process involves finding companies that interest you. There are 3 simple ways to find companies:


  • Look for ETFs that track the performance of a particular industry or sector, and find out their total investments. This is very easy and you only need to search for "Industry ETF X", and the official ETF page will reveal all of the investment fund's properties or the best properties in it.

  • Use a sorting tool to filter stocks based on certain criteria, such as a sector or industry. Equity sorters provide users with additional features, such as sorting companies based on market value, dividend yield, or other useful investment metrics.

  • Search blogs, stock analysis articles, and financial news data to find ideas about companies in the chosen investment sector. Remember, read everything critically, and analyze it from all sides.


The three methods mentioned above are of course not the only ways to choose a company, but they are a good starting point.


A company is more than just a set of numbers, it is a living entity in itself, in which new things and changes happen every day, all of which are very important for its performance and future value. Carefully study the company's core financial statements: revenue, operating margins, and cash flow ... these factors will give you a reasonable picture of the company's current financial position and its ability to make a profit in the short and long term.


In terms of revenue, investors should study the stability and direction of these revenues. Operating margins measure the efficiency of a company's operations, so high operating margins are better than low operating margins. The cash flow figures in the company must be reviewed, especially the cash flow for each share, because this is useful in measuring profitability, and it helps in assessing whether the value of the stock is exaggerated or less than it should be.


3. Read the company's annual report.

Suppose you got the annual reports of several companies, how do you read them to get the information you want?


Trading and investment opportunities:


The reports will appear to be written in an incomprehensible language at first, so it is advisable to meet with a financial advisor to give you a quick lesson first, it is true that this might cost you some money, but you will get invaluable information in the end.


Reading an annual report is the key to being able to determine the value of a company, and with time and training, you will learn how to read numbers and understand what is going on inside the company. You will also begin to understand terms such as goodwill, depreciation, and dilutive existing shares.


4. Keep up with what is going on in the market.

If you want to be a knowledgeable investor, you must keep pace with the events and opinions prevailing in the market. Reading blogs, magazines, and financial news online is one form of negative research that you can do daily. Sometimes a news article or post may build the basis for an investment decision.


How do you choose an investment stock from a news article? For example, reading a newspaper article about a major acquisition could prompt you to do more research on the fundamentals guiding the industry. The Internet provides a vast amount of information easily and provides analyzes of any major event taking place on the market from different investment experts with multiple perspectives. The implicit hypothesis maybe sometimes simple, such as: “There is a tendency to move away from poverty in today's emerging markets, which has led to an increase in the number of people who have moved to the middle class. As a result, there will be an increase in demand for the product/commodity X. ” This hypothesis can be taken to the next level by the investor’s conclusion that increasing the demand for commodity X will lead to the prosperity of the producers of commodity X.


This kind of simple fundamental analysis forms the basis for forming the general "story" behind the investment, which justifies the purchase of any stock in a particular industry. One of the important research requirements is a careful examination of the assumptions and theories of the original hypothesis, for example: if the supply of Q is unlimited, then the pressure to increase demand will only affect little companies operating in the field of selling and producing S. After you do this qualitative research and are convinced of the general premise, you can continue the analysis using corporate press releases and investor offers reports.


How to choose an investment stock successfully in light of the abundance of information and available options that sometimes make the investment decision more difficult than it facilitates. Therefore, determining your investment goals first and performing a stock count based on these goals will help you to start a sound start towards choosing the stocks that will meet your needs. Nevertheless, remember that these screening steps only narrow the list of potential investment options, but they do not replace fundamental in-depth analysis.


Finally, to strengthen your investment knowledge, you should read investment and financial books and everything related to stocks and financial statements.

Choosing a winning stock is very difficult, if not impossible, for this we use the portfolios, and we apply diversification in the distribution of assets. We base our investment decisions on the financial, administrative, operating, and marketing status of companies.

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