Portfolio Planning

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Portfolio analysis considers the risks and returns that an investor may expect from holding a mix of various individual securities. Building a portfolio of stock and bonds require a good amount of research to be made. Gathering of reliable and dependable information is crucial for this purpose. A well diversified portfolio will reduce the risks of making a loss. An optimum portfolio that an investor can build will be one that maximizes returns on the investment made.

An investor not only needs to assess the returns on individual securities, but also will associate the risk with the performance of the whole market. This will help to minimize risks ahead of the market movements.

Another important area is the identification of undervalued and overvalued securities whose returns and the return pattern of the securities market can be compared.

Portfolio evaluation holds an equally important role as securities evaluation. For example, an investor is able to sell a stock that has risen by $14/-. He uses the capital to invest into a new and profitable security. On scrutiny of the security prices, the investor finds that the price of the share he sold has increased by another $5/-. The potential earning of $5/- that the investor lost can be considered as an opportunity cost and not as a loss. This happens because the investor considered the whole portfolio rather than a single security.

Holding on to a falling stock with an expectation that it will rise in the future can lead to loss making. This happens because the tendency of the investor is to book profits. An investor does not prefer to book losses while buying and selling shares. A better option in this circumstance is opt out of the holding and purchase a stock which is more profitable.

The objective of portfolio planning and designing is to achieve proper proportions of each of the holding so as to reduce the risk of making loss to be zero. Perhaps a good way to arrive at this situation is to find securities which tend to perform well when the others do not. This will ensure a more reasonable return for the portfolio as a whole even if a one or few of its components happens to be too risky to hold.