How to create an investment Portfolio based on volatility

The ability to diversify risk  in portfolios, will give you an edge over the market. Portfolios are basically a group of investments managed by an investor with the intention to reduce risk while maximizing returns.

Opening random investments in different sectors can be called a portfolio but it does not necessarily reduce risk or maximize returns. In this post we are going to discuss how we can create a group of investment based on the volatility and returns of an investment. In a later post we will address the diversification based on regions and sectors.

Investments are classified into many types but only those under money market and capital market  will be addressed here.

Money Market Investments:

These investments are often traded within a year. They have low interest rates thus yield low returns. These should not discourage you however they are great investment if you are looking to get great returns within a year. Great money market investments can yield a return of 7-10% within a year.  Examples include Treasury bills, fixed deposits, Certificates of Deposit, Commercial Deposits, Bankers Acceptances.

So how do we integrate this into our portfolio?

These investment instruments are what we are going to use to stabilize our portfolio. The low risk they carry will serve as a hedge (a protection against loss) in the portfolio. The returns from these investments also tend to appreciate in value in times of economic recession thus making them a sound investment choice when the stock markets are performing poorly.

Capital Market Investments:

These investments comprise of long term debt and equity backed investment instruments (stocks related instruments). They are more volatile and offer more returns to investors who are looking to invest long term. Examples, stocks, preference-stocks, ETFs, Bonds.

Role in our portfolio

These instruments are the investments will be looking to grow our portfolio rapidly. They are riskier hence they have to occupy a smaller percentage in the portfolio.

Portfolio Creation

As mentioned earlier the objective of creating a portfolio is to diversify the investments, mitigate risks and plan our cash flows(income stream) as we may be making withdrawals as times passes by.

Step 1: Shortlist investments in the money and capital market

Step 2: Depending on your risk appetite allocate funds to the various markets. Younger individuals are usually expected to take more risks while older individuals are expected to take less risks. Here are the suggestions for funds allocation to these markets.

	Risk Averse Investor	Moderate Investor	Aggressive Investor
Money market	80%	60%	40%
Capital Market	20%	40%	60%
	100%	100%	100%

Step 3: Systematically add to these investments so that they are always maintain their ratio. This is not a must but as you make more investments you must look at the market that needs to be invested in to ensure the ratio is maintained.

NOTE:  if you are to trade Forex you will have to categorize it under the capital market as it is a risky investment. A general rule is to always allocate less fund to riskier investments so the table for a portfolio of money, capital market and Forex will be as shown below.

	Risk Averse Investor	Moderate Investor	Aggressive Investor
Money market	80%	60%	40%
Capital Market	15%	30%	40%
Forex Market	5%	10%	20%
	100%	100%	100%

How to trade stocks for of 30-50% yearly returns

The returns of investments are closely tied to the interest rates of an economy. For most developed countries this interests rates are near zero because their central banks usually desire to keep inflation at a near zero value. As a result of this fiscal policy, most investments in these markets are usually low also. Stocks will usually yield a return of 8% to 12% on the average in these economies while bonds may yield of 5%-10%.

The emerging markets on the under hand are known for amazing returns when it comes to the stocks market. Emerging markets are those countries are not yet developed but are experiencing unprecedented economic growth largely because they are moving away from dependence of export of raw materials to production of goods and services. Some of these include, China, Hungary, Morocco, Malaysia, Mexico others can be found here.

This is primarily because of the growth potential that exists for companies in these markets.  Some of these stocks have yielded returns of over 100% within a year in the past.

Some of the sectors to watch out for include 

Banking sector: This sector acts as as pivot in any economy and is usually the first to pick up or slow down when an economy is about to go into recession or boom.Their number of performing loans will increase in times of boom which will then lead to increase in profits. Watch out for the top banks in these economies.

Manufacturing: The manufacturing sector is usually a major hit when an economy is doing well as the demand of their products will be on the increase and the purchasing power of consumers (the citizens) will be able to match the price set by the manufacturers.

Steps to Trading this Markets

• Understand the industries and economy of the country by reading a briefs
• Make a shortlist
• Get a list of brokers that are reputable that trade their stocks
• Watch out/read the financial statement and strategies of your prospects
• Purchase stocks of those poised for growth

In upcoming post's we will be looking at some of these stocks that have been growing for some time and are likely to yield more returns in the coming months. Ensure you subscribe to get alerts to the post or download our app.

Recommended: Best Trending gold ETFs and Mutual Funds in 2017

We have looked at how to trade gold, why to gold is attractive and common strategies we can use to trade gold in our previous post  on gold but for some traders they prefer to have someone recommend good investments for them rather than analyzing the market themselves here  are some recommendations.

Best Dividend Recommended Stocks

Royal Gold Inc

This stock is listed in the NASDAQ stock exchange. The company is involved in the acquisition of  precious metal streams, royalties, and similar interests. Their Price to earning ratio currently sits at 55 and have a good dividend yield of 1.11%. You can hold this investment for a sizable earning on dividend and return of 10% plus within a year period.

Royal Gold Inc details at a flash

DRDGOLD Ltd.

This is a south African gold exploration company.IT makes this  list because of its relative low price that allows investors to buy more volume and earn more from dividend yield. The rate of return will be higher than buying the same number of shares of another stocks. The highest price so far this year has was $6 and lowest was around $3. This shows the level of volatility the investment have.Nevertheless, this investment has one of the highest dividend yield of 3.2% being 0.11 of $3.45. with that yield you earn a sizable return of 30%-100% per year on your investment should the price reach 6$ again this year. it is a good investment for those with small, moderate and large capital.

DRD GOLD ltd

Newmont Mining

This is a mining company with gold mines located all around the world whose proven reserves amounts to about 82 million ounces. This is a good investment for those with moderate capital and large capital and technical analysis shows it may rebound and pick up soon.

Newmont Mining 

Renowned and Safe ETFs

SPDR® Gold Shares (NYSEArca: GLD)

This is a physically backed gold ETF so it is not like the conventional ETF that is just tracking an index. There are one of the largest gold backed ETFs in the world Currently priced at $121 on NASDAQ. it has been hovering around that price for the last 3 years so it is a quite stable investment to invest in should you want to buy and sell short term or hold in times of crisis.

SPDR Gold Shares ETF

BOTTOM LINE

Every investor wants a diversified portfolio to carter for risk. Having a dividend producing or ETF backed asset just makes it better. Do well to subscribe to get mail updates mailed to you.

Up coming post Technical analysis for gold (XAUUSD) for those of you who prefer to trade gold on a forex broker platform.