A well thought -out portfolio needs balance (photo: Freepik, User22154086)
Building a portfolio – that sounds easier than it is. Because the structure of a portfolio is much more Continuous learning and improvement process. There are different risk types and also different first experiences that often influence the structure. Low -risk investors are increasingly based on high dividend distributions. Risk investors, on the other hand, tend to invest in companies that do not yet make profits or who are based on imagination.
In many cases, investors fail because of the portfolio structure because they ignore risks or do not react to changing circumstances. There are numerous risks to consider. Even those who look far or unrealistic. A portfolio must be structured so that it can withstand the unexpected.
Sector and market concentration
Investors of an MSCI World have recently noticed the risk of a sector and country concentration in their own depot. The strongly USA and technology-oriented MSCI World came under pressure than European values ​​or defensive sectors. Obesity in a certain market or sector leads to a lump risk.
Even if individual regions or industries develop positively for a long time, there is a risk that your own portfolio will have structural or cyclical weaknesses and threaten strong losses. Diversification about regions and sectors is essential to reduce the risk of total loss. A higher concentration is only permitted if the investor is aware of the risks and he can carry it. A clear understanding of the assets is then essential.
Correlation and bogus diversification
While the sector and market concentration relates to the distribution of capital and reflects dominance in a portfolio, the correlation is the relationship between individual shares. In a positive correlation, the shares move in the same direction, while they equalize in a negative correlation. The scattering over individual sectors or countries alone is not sufficient. Even if there are two shares from different sectors and countries, they can correlate with each other.
Than, for example, the weight loss injections of Novo Nordisk In 2023 caused a sensation, this not only had an impact on basic consumption goods such as Pepsi, but also on companies in the medical sector that deal with the consequences of overweight. Blood sugar specialists such as Dexcom and Insulet as well as the sleep apnea company Resed Appeared well from this news.
A correlation in the balance sheet structure, financing or growth orientation could also lead to stronger correlations depending on the economic cycle. In order to keep this risk as low as possible, a minimum number of 20 shares over different industries and countries should therefore represent the portfolio.
Evaluation risks and potential value traps
Growth companies are often traded with high evaluation multipliers. If these companies do not meet expectations or change the macroeconomic environment (e.g. interest), then a clear correction can occur. At the same time, there is a risk of getting into value traps. The focus on low valuation multipliers and high dividend yields can be deceptive. The market is very transparent today and information is quickly accessible, which is why opportunities do not take long.
If values ​​with high market capitalization fall in the course for a long time and are always cheaper, it tends to be an alarm signal rather than a chance of buying. The same applies to high dividend yields. With small caps, however, it may very well be that there is long a valuation discount, since large investors are not yet allowed to invest and that small investors are rather concentrated on larger companies.
Tradability of stocks
If investors only pay attention to the fundamental data, this can be insufficient in phases of increased volatility. Factors such as interest policies, currency movements and geopolitical tensions can put a portfolio under great pressure. In these phases of the increased volatility and market stress, liquidity can also dry out.
Even the trading of Large Caps can be difficult and systems can fail. Small caps or stocks with low free float can become completely unsettable in these phases. So if you have positions in your portfolio that were not very careful, you could risk high losses.
Leverage and missing cash
Some investors speculate on rising courses and even consider loans. This approach can lead to considerable losses in weak stock market phases. Others, in turn, always want to be fully invested and tend to be more emotionally driven in turbulent markets.
A certain cash stock can be part of the portfolio strategy. So that emotions do not gain the upper hand, it is therefore essential to build a portfolio that also withstands unexpected developments.
Disclaimer:
No investment advice. No call to buy or sell securities.