The art of building a portfolio through a simple regular investment plan

There are three evergreen investment principles that investors, as opposed to market punters, would know to follow in any type of market environment. Avoid timing the market, invest for the long term and always diversify one’s investment portfolio. In reality, these principles are often difficult to follow as investors are after all human, with decisions that can be affected by their emotions.
One instance of human emotion interfering with investment principles crops up when the investor first considers making an investment. Investors do not want to buy when the market outlook is uncertain out of fear of losing their capital. Yet they are not willing to invest when the outlook is positive, for fear of buying at a market peak.
Investors also know that steady returns can only be reaped over the long run. Yet the majority of investors still panic when the market performs badly for three days, and liquidate their portfolios (often at a loss), despite having initially invested with the intention of holding the portfolio for the long term.
It is also a fact that diversification will reduce the overall risk in an investment portfolio. Yet we cannot help wanting to invest only in what we think will be the best performing asset, and this results in a narrowly concentrated portfolio with too few holdings. When we see another asset outperforming the one we own, we wondered why we missed out and picked a sub-performing asset instead.
Having a simple regular investment strategy can help investors to overcome their own emotions and irrationality when it comes to making investment decisions.
First and foremost, one has to have an investment horizon in mind, the period of time where you will not be liquidating your portfolio regardless of the market’s performance. You should also ensure that your investment portfolio is not narrowly concentrated on too few industries, regions or in one asset class. The classic study by Elton and Gruber found that 30 is the optimal number of holdings to have, in order to achieve the optimal reduction in the risk from diversifying one’s portfolio.
Next, consider investing your capital gradually over the period of your investment, on an automatic and fixed monthly basis. This will enable you to reap the benefits of dollar cost averaging and potentially lower the overall cost of your investment in the long run.
Using the local SET Index as an example, suppose two investors had each invested Bt1 million into the Index at its peak in 2008 before the “hamburger crisis”. When the Index fell by 20 per cent from the peak, one investor added another Bt1 million to his portfolio while the other divided his Bt1 million evenly to invest on a monthly basis instead until the end of 2010. The portfolio value today of the lump sum investor would be Bt2.6 million, while the portfolio value of the regular investor would be over 10 per cent higher at Bt3 million.
Monthly dollar cost averaging is a trusted investment strategy in the long run for different assets and market conditions. It is important to have a long-term investment outlook and not be emotionally affected by the daily price fluctuations that are common in the short term. If your investment horizon is for the long term and you are prepared to invest with a monthly discipline, you will be able to start investing for the future, today.

Cindy Gian is Asset Development manager, Citibank, NA.