Portfolio

Portfolio

Construction

In the financial sector an investment portfolio is a collection or basket of weighted set of assets. The holder has a finite amount of cash and wishes to optimise the profit of this portfolio.

How do you create a portfolio?

  1. Have money to invest in something
  2. A broker that can execute on your behalf this can be an online broker or one where you need to call to place orders
  3. Open an account
  4. Analyse and allocate percentage of your money to the shares you want to buy

Yahoo is a very good tool for building dummy portfolios. This does not send your trades to the broker. Below is a dummy portfolio to illustrate a portfolio construction.

How you select the stocks to put into your portfolio is a whole new discussion.

Suppose I had $14,000 in 2019, I decided to buy some stock. Having done some analysis I allocate a proportion of my capital to purchasing the stocks. Below is my percentage allocation and the date of purchase.

Dummy portfolio
Starting Capital$14,000
StockTrade DatePurchase PriceQuantityCommissionTotal Cost/sharePortfolio %
TTD20190201197.4251493637%
MDB2019020198.351211181.29%
AYX2019020176.31101764.16%
AAPL20190204170.411011705.113%
PSMT2019020164.66101647.65%
STNE2019020130.41101305.12%
PDD2019020129.94201599.84%
TSLA20190201319.88511600.412%
GS20190201196.751984.57%
IBM20190201138.1351691.655%
13415.45100%

As of today this dummy portfolio will be worth just over $22,000 a rise year on year of 65%.

Note: For the purpose of this exercise all the stocks are in the US stock market and are denominated in dollars. There are no other asset type.

Asset Class

What is an asset class? This is the classification or grouping of financial securities which we can trade. Examples of asset classes are stocks , fixed income, commodities futures and so on.

An example of a stock is AAPL (Apple). AAPL is know as the stock ticker.

An example of a commodity is crude oil, Gold , pork belly etc.

An example of fixed income (bond) is the german bund 10-YR bond.

Knowing this is not enough to trade but it is a simple example.

No Trading Asset Is An Island! – Part 1

No Trading Asset Is An Island! – Part 1

As the saying goes “no man is an island”. In the same way, it seems no stock is an Island. At least not in the trading world. If you trade you have got to factor the mind of the market traders. It is unpredictable!

What are the characteristics that point us to the fact that an asset is not an island? Risk everywhere! Let us use a well know stock as an example. Apple (AAPL) does not manufacture its own batteries, apple supplier list. In fact, it does not manufacture a host of its parts itself. Hence it is dependent on all these countries for the delivery of its product.

What does this mean? Well, first of all, countries of suppliers reside in countries outside Apple’s reporting country. We have some in the United States, Japan, Korea, China, and Taiwan as an example.

Firstly, this means Apple is exposed to currency risk against the foreign suppliers’ countries. So if you trade Apple you will need to de-risk these exposures by hedging in some way.

Secondly, you have a political risk. In recent months we have seen the trade wars between the United States of America and China. Compare timeline with price around that timeline. Notice the price swing in the period leading to this and after. 

It is clear that currencies are paired for example GBPUSD is the British pound against the dollar. So when the central bank governors speak traders pay close attention. So should stock traders because of the exposures they have to these pairs.

If the dollar was to rise against the Yen as an example, products become cheaper to buy from Japan. The inverse is true. If the dollar was to weaken against the Yen, then the cost of production goes up and this affects their bottom line.