How to build a trading portfolio

STEP 1: Define why do you want to invest or trade. Your purpose is very personal. If you thought saving and investing meant the same thing, you were wrong. Savings are the unutilized part of your income. Only when you put your savings partially or entirely into an investment instrument, it qualifies as an investment.

STEP 2: Be realistic about your appetite for risk. Most of us know how much we have saved to date but very few of us have a realistic understanding of how much risk we’re willing to take on to achieve our financial goals. Your risk appetite will depend on your age and financial responsibilities.

STEP 3: Understand the relationship between risk and return. Risk and return are directly proportional to each other. Higher the risk involved, higher is the return and vice versa. For example, you have promises higher returns compared to fixed deposits, but it also comes with a relatively higher risk.

STEP 4: Create a contingency fund. Honestly speaking, this has to be the first. Before you invest or trade anywhere, you must create a contingency fund for those rainy days. A contingency fund worth six months of your current income is good enough to keep you from dipping into your investment funds.

STEP 5: “If you don’t know where you’re going, you’ll miss it every time.” – baseball philosopher, Yogi Berra. That means, you know your purpose for investing, but do you know what it will cost to achieve that purpose.

STEP 6: Invest with a plan. The most successful portfolios are assembled based on a solid understanding of the fundamentals of the individual securities that comprise the portfolio. The portfolio should also factor risk tolerance into the balancing discussion.

STEP 7: Give it time. While there may be some investment choices that you hold for shorter periods of time than others, overall, maintaining the long view should deliver consistently positive returns.

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