Having a well-balanced portfolio is more important than ever. Investors building personal portfolios must diversify based on multiple factors like risk, asset class, sector, volatility, Inflation & so on. Some might have a higher risk appetite than others by investing a significant portion in riskier bets like Equities & Crypto. Others might look toward allocating a large part of their portfolio to safe-haven assets like Gold, Silver & Fixed Deposits.
Before we talk more about various assets, let’s summarise why are we even writing this article? In short, it is because of Inflation. For those unaware of it, Inflation is the silent wealth killer that compounds faster than one can imagine. Think of Inflation as a time bomb waiting to eat away all your savings if not invested wisely across a diversified set of asset classes.
Inflation is happening
Why Inflation happens? The most obvious answer to that question would be money printing. Governments print more money to finance the expenses like wars & social schemes. Another reason for higher inflation would be to supply chain disruption, higher crude oil prices, etc. All this can trickle down into all other areas of the economy and make day-to-day expenditures more costly for the average person.
Now, before you ask why suddenly everyone is talking about Inflation? The US Inflation crossed a 40-year high in March 2022. The same goes with Europe, and India to name a few. Basically, Central Banks have screwed up big this time and now they can’t afford to have higher Interest rates as that would cause this Fiat bubble to collapse. Now, that’s my own thesis & definitely not financial advice.
Asset Allocation & Diversification
Asset allocation & diversification are the two most important things to understand before building an investment portfolio. Investing in a broad variety of assets is called Asset Allocation. The simple definition of an asset can be anything that puts money in your pocket. Things like Stocks, Bonds, Mutual funds, Gold, Silver, Cash Deposits, Crypto, Real Estate, and your Laptop can all fall under this category.
Equity & Crypto
The dispersion of your funds across multiple assets is diversification. You can diversify your stock portfolio by investing in companies from a variety of sectors like technology, financials, healthcare, communication services, and consumer durables for example. Another way to look at this can be to take really concentrated bets on sectors that you think will beat the market in the short term.
Take Crypto for example. Investors can find more than 10,000+ coins/tokens out there in the wild with a huge basket of claims and promises being made to disrupt the existing web 2.0 we all use today.
Therefore, in a unified asset class like Cryptocurrencies, diversification can be done among products, companies, ideas, & use-cases. For example, most new investors may choose to invest 50% in Bitcoin, 30% in Ethereum, and the remaining 20% in other projects or ideas that appeal to them.
Bonds on the other hand operate in an entirely separate domain. You’ve bonds that are secured against assets (ie, Senior Secured Bonds) or unsecured bonds for example.
Companies raise money from the public and private investors by offering them a certain fixed interest rate to fund ventures. Investing in bonds can be tricky for a retail investor, that’s why I would suggest going mutual fund way for both bonds and equities if you’re just starting out. Unfortunately, we don’t have a mutual fund for crypto yet.
Last but not the least, we have instruments like Fixed Deposits. They won’t beat Inflation these days but can keep your money safe in the short term. Investing in Fixed Deposits for long-term wealth creation isn’t possible at all these days. Most Fixed Deposits will offer you anywhere between 4.9% – 6% in 1 year.
Inflation in India right now is sitting at 6.7% for the last three consecutive quarters. Hence, you’ll actually lose money in an FD after adjusting it with Inflation & Tax.
Building a strong portfolio
Hedging your bets and building an overall strong portfolio can take both time & research. Unless you’re willing to put in the effort, something like an Asset Management Company can be the way to go forward. Today we have so many great ways to invest in equities, crypto & bonds. Products like Mutual Funds, SmallCases, STFs, ETFs, and SGBs can be a way to look forward.
While building a portfolio, you must keep in mind that the assets you’re picking will perform well or not perform poorly when the markets turn bearish. Think of this with an example like hedging stocks with Gold or hedging Inflation with Bitcoin.
If you have an unbalanced portfolio, for example, all the stocks or assets that you own heavily rely on a particular sector. In that case, your portfolio can be badly impacted if the industry you invested in collapses in the future. This would not only put your money at the risk of losing but it would also mean that you will be losing out on potential gains from other sorts of investing.
Cash in Underrated
I highly believe that Cash in the bank is underrated. You’ll find people on social media talking about all sorts of places to put your money in & heavily criticizing putting money in a savings account. While I do agree that Inflation is bad for your wealth but if that Cash in the bank saves you from liquidating all your assets to survive during a bear market, the actual return on that Cash isn’t 3% a year.
An emergency fund with something like 6-12 months of expenses must be kept handy in your bank account to save from any uncertainty in the markets.
Crypto may seem fascinating because of the insane in the last 1-2 years but this won’t be there in bear markets following up. A good portfolio in Crypto would consist of 30-60% in Bitcoin, 20% in Ethereum & the rest in 3-4 good projects. This opinion may be different from others who have more than 50 coins in their wallet but this can vary from person to person.
An investor’s best plan of action may be to aim for a lower level of diversification while concentrating on purchasing high-quality assets. More often than not, I see folks buying everything in the marketplaces without having a good reason for doing so.
Growth, income, and value investment should all be considered when categorizing assets. Risk appetite for riskier investments, tolerance and long-term investing are equally important. While diversification should be considered when constructing an investing portfolio, it should not be the primary goal. Instead, the primary goal of an investing portfolio should always be to meet the goals and financial needs of the individual investor.
Thanks to Ethereum Push Notification Service
You may have already noticed that we don’t serve any ads on our website. That’s because of awesome projects like EPNS which help us sustain the website. If you don’t know about them already, it’s a decentralized Web 3.0 based notification platform. Unlike Android or iOS notifications, EPNS uses a decentralized approach to send alerts about your activities on DEXs and platforms like CoinDesk, MakerDAO, BTC Tracker, and more.
How to get started?
- Firstly, you’ll need to have a wallet like Metamask, WalletConnect, etc.
- You can then download the EPNS application from Play Store or App Store and sign up using the Wallet ID.
- If you’re like me, a Browser Extension must look like your favorite option.
- Go to the available notification channels.
- Click on “Opt-In” & Sign the popup. It’s free and doesn’t take any gas.
- That’s it.
The best part, EPNS is already working on a Wallet to Wallet messaging service. If you haven’t checked them already go now!