As we draw closer to the year-end of 2022, there are likely many tasks you want to complete before the new year. However, reviewing your ‘trading portfolio’ must be one of your top priorities which must not be neglected. Successful traders always revisit and review their trading portfolios every six months, quarter, or year to ensure that they are not drifting away from their initial financial targets.
Is it necessary to have a portfolio analysis periodically?
Yes, of course! In light of all the changes your trading portfolio might have undergone over the last year, it would be wise to take a moment to review your holdings.
Every Market participant (whether a trader or investor) should be aware that many factors can change over time: their risk profiles, their economic situation, their investment objectives, and sometimes, the overall market climate. For this reason, it is prudent to periodically review your trading portfolio in order to ensure that your financial goals are being met.
While it is sometimes argued that looking at your trading portfolio frequently can lead you to think that it is performing worse than it actually is, and the less likely you are to invest correctly for long-term success.
We believe, however, 2022 was an unusual year in more than one way.
What happened to Trade Portfolios in 2022?
The performance of investment & trading portfolios in 2022 has been disappointingly low.
While it is not unusual to see large declines in stock prices at the same time as large declines in bond prices. The worst part is that by the end of October, the investable U.S. stock market had declined 18.8% over the year and the investable U.S. bond market had declined 15.7%.
There has never been a worse performance in the aggregate bond market in the last century. Investors who have grown accustomed to bonds as highly effective diversifiers are shocked by the news. As an example, when the U.S. stock market dropped by 37.0% in 2008, the bond market gained 5.2% to offset some losses. Find out how policy decisions impact the stock market overall.
2022 was the worst year for crypto too!
Crypto advocates have paid a high price for a dreadful 2022. The decentralized finance system, or DeFi, has been shown to be vulnerable to hacking. There is nothing stable about a stablecoin. And a single collapse of one of the world’s leading crypto exchanges can shock the entire crypto industry.
The crypto market reached a peak valuation of almost $3 trillion in November 2021. As inflationary pressures and a gloomy economic outlook spooked investors, it had lost over two-thirds by June 2022. The purpose and role of cryptocurrencies in the broader economy have naturally been questioned – a debate that pits passionate supporters against skeptics.
On Nov. 14, 2022, the total market capitalization of the top 100 cryptocurrencies stood at $830 billion. From Nov. 7, 2021, when the market cap was $2.7 trillion, it has fallen by approximately 70%.
Inflation is the key factor to consider!
Unexpected high inflation and the US Federal Reserve policy of aggressive interest rate hikes are also blamed for the decline of trading portfolios. The inflationary trend is here and will continue for some time. No matter where we are in the inflation cycle at the moment, it will likely result in further Fed rate increases through 2023. It is therefore highly likely that a recession will occur.
Looking forward to the new year and bracing ourselves for a shrinking economy, the end of the year is a good time to assess our risk appetite and assess the strength of our trading portfolio over an extended period. However, it is important to avoid drastic changes and headline-driven moves when moving through this market and positioning your trading portfolio for the coming year.
Why Is It Important To Review Your Trading Portfolio?
Reviewing your trading portfolio is as necessary as upskilling your professional skills. As the seasons change, technologies change as well. Similarly, it is important to check whether the investments you have made are aligned with your financial goals and are aligned with market conditions. Three reasons motivate traders to do so:
- In order to determine whether our holdings are performing according to our initial expectations
- Some people view their trading portfolio often due to apprehension that things may go wrong or they may miss out on opportunities based on the information and news flow.
- In another scenario, you might have decided that you would like to change your financial goals due to unforeseen circumstances.
In all cases, it is important to reassess your asset allocation and remove investments that will impede your financial goals. Thanks to technology, checking trading portfolios has become much easier with the arrival of advanced trading app solutions.
6 Simple & Effective Steps To Review Your Trading Portfolio
Trading portfolio reviews enable you to better understand your financial holdings and prevent you from deviating from your financial goals by making informed decisions aligned with your trading strategies. The following 6 important steps will help you assess your trading portfolio at the end of the year:
1. Aim for a trading portfolio that aligns with your goals
Over the course of the year, you should review your trading portfolio to ensure that your holdings remain aligned with your goals, investment horizon, financial situation, and risk tolerance. In the case they are well-aligned, it is a positive sign, but if not, adjustments must be made. Ensure your financial goals are on track with a trading plan that includes your envisioned financial goals.
You might be faced with some changes to your financial profile and career objectives because of a number of reasons, for example, the uncertainties that are associated with the recession. As such, reviewing your trading portfolio periodically is the key to ensuring that it remains aligned with your financial goals.
Successful professional traders distinguish themselves from mediocre traders essentially by how their goals are perceived and how they approach trades.
2. Review your trading portfolio’s performance over the past year
The next step after ensuring that your investments align with your financial goals is to analyze the performance of your trading portfolio. The performance of your trading portfolio depends on the types of assets/schemes you hold and their respective performance. Sometimes, however, your portfolio may perform poorly despite a strong underlying asset class. Therefore, you should identify underperforming holdings and replace them with better alternatives if necessary.
However, you should not panic and make changes to your portfolio if it begins to underperform during a sour market. To find consistent underperformers, you need to analyze the various quantitative and qualitative aspects of your holdings; short-term underperformance can be ignored due to market volatility.
You will be able to make better investment decisions if you thoroughly review your portfolio performance. Taking this step will assist you in avoiding holding unworthy and unsuitable investments that can hinder your progress. To generate optimal returns, you must eliminate consistently underperforming investment avenues, identify any red-flag investments and maintain a healthy portfolio.
3. Make sure your Assets are Well Diversified
As you review your trading portfolio every year, it is a good time to consider the asset mix of your investments. To ensure a successful diversified portfolio, you must set asset allocations that correspond with your financial situation, risk tolerance, and time horizon. If you have recently undergone a major life change, you may also need to adjust your investment strategy and mix of assets.
Let’s say you haven’t reviewed your trading portfolio in a while. Your equity and debt investments could be drifting away from your asset allocation strategy because of the market’s performance of asset classes.
A winning trader’s ideal asset allocation consists of a combination of equity, debt, and other asset classes since no two asset classes perform in the same way. A robust portfolio can thrive in any market cycle if its assets are allocated appropriately and diversified well.
If your current investment mix does not meet your needs, you may reallocate your investments into the desired asset classes to establish a more favorable risk-reward ratio. Invest in an ‘All-weather’ portfolio that will ensure your holdings are well diversified within asset classes to withstand market swings.
The uncertainty investors face today has led to an increase in many individuals’ start investing in foreign currencies such as the USD, which offers both long- and short-term returns.
4. Don’t take unnecessary risks
Making sure you don’t take any undue risks when reviewing your trading portfolio is another important step. In a market downturn, it is important to balance your risk-return ratio and identify your portfolio’s risk exposure. The higher your risk, the larger your losses may be. Therefore, you should avoid taking any undue risks by investing in avenues that align with your risk profile.
Your current holdings may be ideal according to your earlier asset allocation, but your risk profile may have changed in light of market dynamics and uncertainties due to the pandemic. When your portfolio is heavily geared towards equities, which are high-risk, high-return investments, but your risk tolerance level has dropped to moderate or conservative, you will need to rebalance it and move to safer investment alternatives. Maintaining a healthy portfolio performance requires a trading portfolio that matches your risk profile.
5. Focus on improving your return potential
In addition to evaluating your current portfolio, eliminating underperformers, and changing the asset mix, a periodic trading portfolio review will also improve your return potential by investing in new promising areas.
Once you identify the holdings that have not been performing well for a long time or that have exposed you to an undue level of risk, replace them with mutual funds that will improve the portfolio’s overall performance. Your financial goals and objectives can be achieved through new investments that can help you achieve efficient risk-adjusted returns.
Intelligent investors use ‘safe haven assets‘ to offset risks in their portfolios during declining economic times such as the present. While some assets are on the decline in financial crises, safe haven assets usually perform better.
6. Take steps to rebalance your portfolio
There is a difference between reviewing and rebalancing. By rebalancing a portfolio, you correct deviations from its original allocation. As an example, you initially allocated 60% of your equity portfolio to large caps and the remainder to mid-caps and small-caps. Following a sharp rise in the value of mid-cap and small-cap stocks, it is likely that your overall allocation to large caps has been reduced to 50%. During portfolio rebalancing, you need to reduce exposure to mid-caps and small-caps while simultaneously increasing exposure to large caps.
It is not necessary to rebalance your portfolio every time you plan to review it unless there is a significant deviation from the original mix. The rebalancing of your trading portfolio will improve its performance and reduce your exposure to any particular asset category or subcategory. You will be able to determine when rebalancing is needed for your trading portfolio as you review it periodically.
While diversification is the key to a profitable investment portfolio, diversification does not necessarily require a broad range of assets to be successful. Warren Buffet, an absolute investing genius, says that diversifying within one asset class is likely to yield better results more quickly. Choosing an asset, however, must be done carefully.
When it comes to clever portfolio management, diversification is key. This technique involves spreading investments across various financial instruments and industries in order to decrease the risk of loss associated with any one-off event. In other words, by diversifying your capital across multiple areas you can maximize returns while minimizing risks – that’s a win-win! There are numerous attractive options when it comes to diversification strategies; taking time now exploring these could pay dividends for years down the line.
Financial Portfolios Explained for Beginners
As you determine the best route for your portfolio as a beginner, first you need to know that all investors have their own set of considerations to take into account – goals for the future, risk appetite, and personality. So, a financial portfolio consists of what type of asset mix fits your needs and wants most appropriately.
- Your financial portfolio is a compilation of your financial assets, such as stocks, bonds, commodities, gold, currencies, cash, and their corresponding funds. Invest in the right mix of these assets based on your strategy and skills.
- Stocks and bonds are usually regarded as the fundamental components of any portfolio, though you can also build your portfolio with a variety of different other assets such as real estate, precious metals, and art collectibles.
- Establishing a diversified portfolio is essential to successful investment management.
- To construct and maintain an ideal investment portfolio, it is vital to take into account your personality which includes your tolerance for risk, your desired outcomes from investments, as well as the length of time you have available.
- Skillful portfolio management is indispensable in actively managing investments.
Furthermore, remember to factor in aspects such as tax position requirements, liquidity demands, and legal obligations along with any other personal parameters when constructing an investment plan tailored specifically to you.
Top Tips for a Good Portfolio
A Good portfolio is always based on a good financial strategy. The top tips for a successful portfolio are based on the following factors:
- Choosing the right investment style. Assessing your lifestyle, financial situation, psychology, and risk tolerance. It takes tolerance to make money.
- Gaining the knowledge. You need to acquire knowledge of finance and markets. It takes knowledge to take smart moves.
- Setting the strategy and goals. The strategies you choose should be focused on realistic and effective goals as well as considering long-term objectives. With a judicious approach, you can build wealth gradually over time.
- Diversify your portfolio. Selecting the right mix of assets. There is no right formula or mixtures, there are different approaches you need to study.
- Developing a disciplined investment plan. Get regular reviews to make sure your investment goals stay aligned with market realities.
How Do You Measure a Portfolio’s Risk?
Risk assessment of an individual investment is made possible through the Standard Deviation method. Utilizing this technique, you can calculate how much its returns differ from their average over a given period of time. In addition to measuring the risk for single investments, it also works on portfolio levels where you can estimate the variance in actual returns as well as the variability that comes with them by computing the Standard Deviation of those results. Therefore, if higher deviations are calculated – greater risks become apparent for your investments!
Even though you don’t need to be an expert in finance and accounting to understand portfolio risk calculations, it is essential that you know how to reduce your risks. Fortunately, the experts are here to help! With their knowledge and guidance, they will make sure your portfolio stays safe and secure.
Calculating the risk of a portfolio requires considering both the weights assigned to each asset and their respective covariances. Consequently, computing its standard deviation necessitates an equation such as σp= (w12σ12 + w22σ22 + 2w1w2Cov1,2)1/2 where w is weight and Cov indicates covariance. With this formula, you can easily determine how much risk your investment carries.
Why It’s Important to Pick a Reliable Trading Platform/App?
Choosing a reliable and user-friendly forex platform/app is a major decision in your trading journey, since the platform/app functions as your trading partner. Typically, a trading app/ platform that provides comprehensive market analysis, trading tools, and educational materials is considered the ideal trading companion.
Furthermore, your trading opportunities and gains can only be maximized if the app/platform you choose comes with comprehensive functionalities. In light of this fact, AximTrade Mobile App provides all the necessary tools for a smooth trading experience with real-time data notifications and QR access for partners, and MT4 alerts for your trading activities.