Before you begin buying and selling you need to clearly define your portfolio and trading objectives. Setting these objectives will serve as a guide or rule book by which all your decisions regarding the portfolio adheres to. For example, you may decide that your portfolio is designed to provide a stable long term income with low levels of risk. With such an objective firmly in place it would be contradictory to the stated objective to start investing in high risk futures contracts as you would be jeopardising the goal of achieving long term income with low levels of risk.
Some other sample portfolio objectives might include (but not limited to):
- High growth, unlimited risk
- Stable income, moderate risk
- Indexed growth with low risk
- 2% pa return above current consumer price index (CPI)
- Moderate growth, moderate risk
Portfolio objectives are designed to get you thinking about why you’re investing.
Asking yourself a simple questions like:
I am trading in the market because I want to……
Will give you a clearer picture what your motivations and goals are for investing.
Of course portfolio objectives are not permanently set in stone and you should always re-evaluate your objectives against your current financial situation. The act of reviewing and fine-tuning your portfolio objectives on a regular basis is called “active portfolio management” and is what you find most successful traders doing on a regular basis.
And as your financial circumstances change you may need to re-align your portfolio objectives which is a crucial part of successful investment portfolio design.