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ExamplesLet us study two examples in this section.Example #1Suppose Jenny is a new investor looking for assets for investment. She reads many books, watches finance videos, reads stock market blogs, and seeks advice from fellow investors to arrive at a decision. Jenny’s investor friends regularly talk about diversification. She understands that it refers to not placing all her money in a single asset or asset class. She also gathers more information about how to invest and begins investing.To ensure diversification, Jenny keeps some portion of her funds in fixed deposits. She invests 15% of her funds in stocks and employs 55% of her capital in real estate markets. With the remaining money, she purchases to receive regular income in the form of interest payments for the next nine years.In this way, Jenny’s portfolio is diversified and balanced. While Jenny considered several and asset types, she decided to invest in the ones mentioned above based on her existing financial condition, levels, and investment time horizon needs.Example #2In a November 2023 , Josh Lohmeier, Portfolio Manager at Franklin Templeton Fixed Income, discussed a portfolio management process that deviates from the traditional approach and integrates a data-driven portfolio construction and management strategy. He highlighted the importance of exploring new methods since traditional options may not offer adequate returns in current markets that pose significant challenges.He further advised investors to implement robust risk management strategies to protect their capital and minimize losses. For this, he suggested using quantitative models that offer key insights for risk management and , which may not be highlighted when a traditional approach is followed. Through this article, he proposed employing a dynamic approach that involves quantitative and qualitative assessments before making . This article offers useful input that can guide portfolio construction decisions.Challenges And SolutionsIn this section, the challenges and solutions involved in this process have been discussed.#1 Challenge - Right investment stylePicking the right investment style is a major challenge for many investors. Given the and constant shifts, investors are required to choose the aspects on which they wish to focus. These include growth, returns, risks, etc. They may need to take a mixed or customized approach based on their investment and . The investment style must be tailored to their objectives.SolutionInvestors should study the market well and define their financial goals before investing.They should look for significant value generation from their investments and choose companies with innovative, long-term vision.#2 Challenge - Striking a balance between investmentsStriking a balance between investments is an ongoing challenge for many investors. The urge to second-guess investment decisions, particularly when markets seem fluid and stocks fluctuate, can be strong. Comparing investment decisions that lead to unreasonable conclusions is also a possibility. This can result in emotional decisions and poor investment choices. It can hamper judgment while selecting and markets for investment.SolutionInvestors should prioritize logic over emotions.They should have a long-term vision.They should understand the risks involved in investing in specific assets and markets and consider their before making significant decisions.#3 Challenge - Reacting to fears, notions, and market rumorsAnxiety, fear, and panic are triggered by misinformation and rumors. Reacting hastily based on market rumors, news, and personal fears is a significant challenge many investors struggle with frequently. Such behavior can lead to poor investment decisions and ultimately hinder long-term success.SolutionInvestors should focus on .Before making decisions, they should ascertain the validity of specific news or rumors.#4 Challenge - Building a portfolio with a time horizonWhen investors start investing, they are driven by the idea of securing the highest possible returns in the shortest possible time. Every investor has short and long-term financial goals, and it becomes challenging to maintain a portfolio with conflicting time horizons.SolutionA portfolio should be constructed keeping in mind that market conditions change over time.An investor must practice patience, especially with fluctuations.They must set their goals in advance and invest in assets that offer the required returns within the required timeframe.Disclosure: This article contains affiliate links. If you sign up through these links, we may earn a small commission at no extra cost to you.Frequently Asked Questions (FAQs)1. What are the factors affecting asset selection during portfolio construction?The factors that affect asset selection include:- Investment goals, risk tolerance, financial condition, investment knowledge, liquidity, and investment time horizon of an investor are important considerations. - Asset types and expected returns are vital, too.- A country’s economic condition and taxation policy steer investment decision-making.- The investing style and mindset of an investor affect their asset selection.2. Which type of assets should be included during portfolio construction?Investors can consider primary and alternative investment options while constructing their portfolios. The primary asset classes include equity, bonds, cash, and real estate. Alternative investment options include hedge funds, commodities, private equity, cryptocurrencies, etc. Depending on their financial condition, age, risk appetite, and investment goals, investors can select suitable assets.3. What are the advantages of portfolio construction?The main advantages of portfolio construction are:- Diversification: Overall risks can be reduced through diversification.- Risk management: It ensures protection from market fluctuations and corresponding risks by tailoring asset allocation to individual risk tolerance.- Capital appreciation: Long-term growth is possible, and investors can enjoy returns from multiple sources by building a reliable investment portfolio.Create a Full Dynamic Financial Model in 2 Days (6 hours) | Any Graduate Or Professional is eligible | Build & Forecast IS, BS, CF from Scratch.Join WallStreetMojo YouTubeThe Exact Training Used by Top Investment Banks | FM, DCF, LBO, M&A, Accounting, Derivatives & More | $2400+ in Exclusive Benefits | 100+ Wall Street-Level Skills.Join WallStreetMojo InstagramBoost Productivity 10X with AI-Powered Excel | Save Hours, Eliminate Errors | $300+ in Exclusive Bonuses | Advanced Data Analysis & Reporting with AI.Join WallStreetMojo LinkedInMaster Excel, VBA, PowerBI Like a Pro | 70+ Hours of Expert Training | Real-world Excel applications | Earn Your Certification & Land High-Paying Roles!Join WallStreetMojo FacebookJoin WallStreetMojo XCompanyOur PoliciesResourcesPartner with usSupportFollow us onCompanyOur PoliciesResourcesPartner with usSupportConnect With UsTop CategoriesBlog CategoriesFree CoursesCourse Categories|||||||||||||Blog Categories||||||||||||||||||||||||||||Free Courses||Disclaimer: Copyright © 2024. CFA Institute Does Not Endorse, Promote Or Warrant The Accuracy Or Quality Of WallStreetMojo. CFA® And Chartered Financial Analyst® Are Registered Trademarks Owned By CFA Institute.Our Privacy Policy© 2020-24 Wall Street Mojo. All Rights Reserved, To build wealth, you’ll need a balanced, diversified portfolio that reflects your investment goals, risk tolerance, and time horizon. Asset Allocation vs. Security Selection: What's the, Portfolio Construction is the process of investing in different types of asset classes and financial products, keeping market types and risks, diversification needs, fund management efficiency, risk tolerance, investment time horizon, and long-term and short-term financial goals in mind..
Building an investment portfolio can be broken down into the following simple steps. Each step sets you up for success with the next step. Ultimately, you’ll have a better chance of, As you work toward a well-diversified portfolio, you can use Morningstar Categories to better understand the different types of investments. And you can use my Role in Portfolio framework to, Investment portfolios don't have to be complicated. You can use funds or even a robo-advisor to build a simple and effective portfolio. Many, or all, of the products featured on this page, , , .