Guide to sound portfolio management

The Ultimate Guide to Sound Investment Portfolio Management.

A sound approach to portfolio management is key to long-term success in investing. The Ziggma platforms provides you with all the tools and data you need to confidently manage your investment portfolio over time and reach your long-term investment goals.

It cannot be stressed enough that failing to keep up with your portfolio is a huge mistake and tremendous drag on returns over time. Clearly, it can be cumbersome to look after a portfolio with a certain number of holdings. But well-designed platforms with an investment portfolio tracker and cutting-edge stock research tools provide the solution to this problem.

In this article we will explain what a sound portfolio management approach consists of.  It will address all of the most frequently asked questions from our users. What are the key parameters to watch? How to monitor these? How to make adjustments? How can Ziggma help you manage your portfolio better?

Investment portfolios are in perpetual motion.

Portfolios are dynamic. Even if you don’t trade. Take a look at this example. Imagine two years ago you constructed a five stock buy and hold portfolio, equally weighted between five stocks – TSLA, JPM, AAPL, DIS and TWTR. Two years later, you would find your portfolio heavily exposed to TSLA making up two thirds of your portfolio. In this particular example the principle of diversification has completely gone out the window.

Portfolio diversification over time

Add to this the fact that for the most part of this two year period TSLA was not exactly the financially soundest company. The company was loss making until last year and would have been even more loss-making had it not been for carbon credits. It was highly indebted and dependent on a single factory. A bit of a house of cards really. So you would have ended up with a portfolio exposed at over 50% to a company that was not far from going bust.

A sound approach to portfolio management starts with diversification

You have heard it so many times. The concept with the famous “eggs and basket” analogy is straightforward. A well-diversified portfolio will provide you with a significant degree of downside protection. We are not saying that you can’t have a couple of high conviction positions. But make sure to mitigate portfolio risk by not letting a single stock take over the entire portfolio, as shown in the above mentioned example.

Risks affecting an investment portfolio

As we explain in our blog article The Importance of Investment Portfolio Diversification and How to Monitor It, there are two types of risks to be addressed through proper diversification. Idiosyncratic risks, i.e. risk specific to a company or an industry, and market risks.

Idiosyncratic Risk. Any company is exposed to a multitude of risks. These can come from the inside, for example from bad management, or from the outside, such as regulatory changes or natural catastrophes. Similarly, at the industry level, entire industries face risks as well, for example structural change.

Market Risk. Expressed as market volatility, market risk affects all market participants and assets. Drivers are factors such as political conflict, inflation or interest rates. These factors will affect different types of asset classes, industries and even companies in different ways.

How to construct a well-diversified investment portfolio?

investment portfolio construction

When it comes to investing, the right formula differs from one investor to another. If you are a risk averse investor, you need to start diversifying from the asset level on. You will need to build your portfolio on bonds, large diversified ETFs and large cap stocks. If you are young and prepared to take on some risk, you are likely to invest in stocks of high growth companies. Ziggma’s ultra-fast free stock screener will get you results quickly.

These are the key diversification categories:

Does a well-diversified portfolio increase returns?

  1. Geography. Global brokers, such as Interactive Brokers make it possible for any investor to add geographic diversification to a portfolio. This means that you can own stocks from outside your country or even continent at a very reasonable price thus adding geographic diversification to your portfolio. There are also many ETFs that focus on particular countries or regions.
  2. Asset class. As mentioned in the introduction, different asset classes come with their respective distinct risk and return profiles, which investors need to consider in light of their individual financial situation and degree of expertise. The main asset classes to consider are bonds, stocks, ETFs and increasingly alternative asset classes, such as crypto currencies, crowdlending and-funding, or even collectibles. If you think bonds are two complex, you can easily get exposure to this asset class via bond ETFs. On the Ziggma platform you can find various ETF model investment portfolios comprising some of the best bond ETFs in the market.
  3. Industry. The Ziggma screener comprises 31 different industries. And, even industries themselves can be very heterogeneous. So please make sure that you spread your holdings across different industries.
  4. Stock. This is the most obvious one. No single stock should make up a disproportionate share of the portfolio. As rough rule of thumb, no stock should make up more than (1/total number of stocks) + 10%.

If you are retired and reliant on a consistent revenue stream, you should add bonds for low risk and reliable income. Very importantly, do not buy high yield stocks with 6% yield or more. These are almost never good investments, as we explain in our blog article Why It Is Dangerous to Invest Based on Dividend Yield.

How to monitor your portfolio diversification

All this sounds familiar and straightforward, doesn’t it? Then why do so many investors not abide by these simple concepts of sound investing? Chances are that for many investors monitoring diversification is just too cumbersome.

Recognizing this problem, we went to work to develop a solution.

The solution to monitoring portfolio diversification

Meet Ziggma’s Smart Alerts. These consist of limits set by the user that shift the task of monitoring onto Ziggma. Thanks to our sliding scales, limits can be set within seconds. After that, we take over the monitoring for you so that you can spend time researching new stocks. Or spend some quality family time.

Risk Management

Portfolio risk management

Keeping a portfolio diversified is already a form of risk management and thus represents an integral part of a sound approach to portfolio management. But there is more to risk management. Unfortunately, many investors flinch when they hear the term risk management, which they tend to associate with complex math. This is a fallacy. Proper risk management is accessible to anyone. Paying close attention to the following two risk parameters can make all the difference.

Beta

Knowing your portfolio’s beta gives you an indication how much fluctuation to expect from your portfolio relative to the overall stock market (the S&P500 to be precise).

It’s simple and there’s no need to overcomplicate matters. If your portfolio beta is equal to 1, you can expect your portfolio value to fluctuate in tune with the broader market. If your portfolio beta is significantly greater than 1, you may have to hold your breath at times, as the swing in your portfolio value will see higher fluctuations (often referred to as volatility) than the broader market. Vice versa, if your portfolio’s beta is below 1, you will see less volatility than the S&P500.

Outperfom the market with a low volatility portfolio

Did you know that low volatility stocks tend to generate higher returns than high-volatility stocks? In case you didn’t, then you may want to learn about the low-volatility anomaly.

Low volatility anomaly

In essence, by showing that that low-volatility stocks have higher returns than high-volatility stocks in most markets, the Capital Asset Pricing Model (CAPM) is essentially invalidated. This widely followed theory stipulates that a stock’s expected return should be a positive and linear function of beta. Various empirical studies show however that by owning a low beta portfolio you increase your chances to outperform the market. Ziggma’s suite of model investment portfolios – available to Premium subscribers – comprises several low beta model investment portfolios to provide ideas and inspiration to our users.

Sharpe Ratio

The Sharpe Ratio is a widely followed measure that puts investment returns in perspective by measuring it against the risk taken on to achieve the returns. The concept is very simple. For example, for an identical rate of return of 10% per annum, it is much preferable to achieve this with a lower rate of volatility. It provides for better sleep and a lower drawdown at any given point in time. The Sharpe Ratio for a 10% return with a lower degree of volatility would be higher than for the same rate of return that is achieved at a higher degree of volatility. Investors generally aim to achieve a Sharpe Ratio that is higher than 1.

Portfolio quality – Often overlooked as a key aspect of a sound approach to portfolio management

Possibly the most important task for any self-directed investor is to monitor portfolio quality. When you own shares in a company or several companies, you want these companies to progress, do better. How do you measure this? Generally, the most applicable measures are growth and profitability, and naturally both combined, i.e. profit growth. If you think about it, you do not want to invest in companies that are mediocre or, worse, deteriorating. Just like you do not want your favorite sports team to continually miss the play-offs.

Keeping on top of portfolio quality with the Ziggma portfolio tracker

Portfolio metrics dashboard for a sound approach to portfolio management

Ziggma’s portfolio tracker helps you stay on top of portfolio quality, which is a key aspect of a sound approach to portfolio management. The portfolio dashboard shows you key portfolio quality metrics, such as average revenue growth or average profitability. Through the average portfolio Ziggma Stock Score, Ziggma users get a highly valuable gauge of portfolio quality, as they benefit from our cutting-edge big data research capabilities. Investors with an interest in socially and environmentally responsible investment benefit from a portfolio-level ESG score on the dashboard.

Socially and environmentally responsible investment equals higher returns

Knowing how exposed and how well your portfolio companies manage their material ESG issues has become an increasingly important part to making well-informed investment decisions. There’s a growing body of industry research which supports the proposition that there are positive correlations between ESG rankings and risk adjusted equity returns. In light of the short track record of ESG scores, as well as their ongoing shortcomings, this statement needs to be taken with a grain of salt.

Yet, there is a high probability that the proposition is true. In the end, what a ESG score ultimately reflects is how well a company is managed. The E, which stands for environmental, addresses preparedness for the many all too familiar environmental challenges, including climate change. The S, which stands for social, captures a company’s concern with social issues. This is not only important in itself but it can also protect companies’ reputation from backlashes through social media against the backdrop of shortcomings on social issues. The G, which stands for government(al), reflects a company’s performance on corporate governance. This can range from shareholder involvement all the way to employee pay. It is apparent that the range of topics that go into ESG scores is vast. But so is the scope of responsibilities for a senior management team in literally any company.

Thus, in addition to financial key performance indicators, the ESG score ultimately provides an excellent reflection of how well a company’s management performs.

Monitoring portfolio quality over time

As one of our most popular features the dashboard provides Ziggma users with some of the most important metrics for an actively managed investment portfolio. While it is great to have these metrics on hand, they are even more valuable when put in chronological perspective. 

We believe, every investor should know the answer to these questions.

How does my portfolio risk evolve over time? 

Is my portfolio’s average yield going up or down? 

Am I making sure that my portfolio quality is improving and not deteriorating? 

Small charts next to each dashboard metric let you monitor the evolution of key portfolio parameters over time. For example, these charts let you check quickly whether your portfolio risk has increased or decreased significantly over time.

Portfolio risk tracker

Monitoring portfolio companies’ financial performance

Keeping a close eye on portfolio quality at the portfolio level will greatly increase your chances to achieve your long term investment return objectives. However, you should not stop short of also closely watching your individual holdings. You need to make sure that your portfolio companies keep progressing in terms of growth and profitability – except perhaps during periods of economic crisis. Part of the monitoring of individual companies also pertains to assessing their financial strength. It is not a rare event that a strongly growing company, that may even be profitable, files for bankruptcy out of the blue because it is unable to repay a major loan falling due. This type of scenario tends to happen in the context of private equity deals whereby an acquired company’s balance sheet gets loaded up with debt.

Here’s a convenient way to get around the time-consuming task of monitoring portfolio companies. It is available to Ziggma Premium users. These have the possibility to check at any given point in time which stock is the best to own in a given industry. If you are committed to owning stocks, then you would want to own the best stock(s) in an industry. By owning the best-in-class stock in the industries you are interested in you get around the obligation to monitor companies’ financial performance. By owning the best company, you cannot do better anyhow.

Portfolio quality tracking is an integral part of a sound approach to portfolio management.

The Ziggma platform provides an additional, more granular, approach to monitoring companies’ financial performance over time. It is also available to users on the free plan. In the menu tab Fundamental, Ziggma users can consult key metrics of their portfolio companies’, such as PE ratio, ROE, net margin, revenue growth, income growth as well as the difference in percent from the analyst consensus price. Professional portfolio managers spend many hours monitoring their portfolio companies’ financial progress over time on growth, profitability or balance sheet strength. Ziggma Premium subscribers get the highly valuable added benefit of being able to see their holdings’ current key financial metrics next to the respective historical value as of the time of purchase. Combined with color coding, green for improvement, red for deterioration, Ziggma Premium users can identify positive and negative trends at portfolio holdings at one glance. Features, such as these, greatly contribute to make investing easier and more accessible to less experienced investors.

How to track and monitor your portfolio? Meet the Ziggma Portfolio Tracker

As mentioned in the introduction, most investors come up short because they fail to properly monitor their portfolio and its holdings. This sad outcome is largely due to the lack of tools made available to investors by their banks and brokers. While professional portfolio managers keep a close eye on their holdings, retail investors tend not to do this. Consequently, they will fail to take note when their portfolio gets over-exposed to a specific stock or industry. They are likely to react as portfolio risk becomes too substantial relative to their risk tolerance. And, they most certainly will not take note of portfolio companies’ underperforming.

The convenient solution to proper portfolio monitoring

At Ziggma, we identified this issue and went to work on a solution. In addition to our popular dashboard we provide Premium users with our Smart Alerts feature. Through this one of a kind feature, Ziggma users can shift the burden of portfolio and stock monitoring on to Ziggma. Thanks to our convenient sliding scale technology Smart Alerts can be set in a matter of mere seconds. You can set your tolerance level for the maximum weight of a stock or industry in the portfolio, hit save and let us take care of the monitoring. Once the threshold set by you is reached, you will be notified so that you can take the appropriate action. There are a multitude of parameters for which you can set smart alerts. These include exposure to a single stock, exposure to a single asset class, exposure to a single industry, portfolio risk, dividend yield, stock price or PE ratio. 

Portfolio diversification and smart alerts

You have to take action? How to take the optimal decision?

Investment portfolios are dynamic. We believe that the concept of buy and hold in the strictest sense is a fallacy. Just think about this. Some portfolio companies will always fall behind their peers just as your favorite sports team will not win the championship each year. Or, as in our example on portfolio diversification, following strong performance some stocks will at some point make up a disproportionate share of your portfolio. So, far from becoming a day trader you will want to act once a portfolio company is no longer best-in-class within its industry. Just like you would want to take action when a portfolio holding starts to make up a disproportionate share of your portfolio.

Ziggma helps you with decision making

The free stock screener

So how to make the optimal decision? No worries, Ziggma has got you covered in various ways. Our high-performance stock and ETF screener will help you find the best results for your investment criteria very quickly. Thanks to our sliding scale technology you can set search parameters in a matter of seconds. Search results are updated in real-time.

Professional-grade company profiles

Once you have zoomed in on a particular stock, Ziggma presents you with financial data in a well-organized and intuitive manner. With many seasoned financial analysts on our team we were in a position to draw from ample experience presenting company financial information to portfolio managers. If you ever need to dig deeper, you can take a look at a company’s financials with both sides of the balance sheet placed neatly next to each other. The income statement and cash flow statement are also placed side by side for easy reconciliation.

Portfolio Simulator

Following thorough research, you have decided on which stock or ETF to buy. But what is the optimal quantity or amount to invest in the security? The trade will have an impact on many different portfolio metrics, such as the weight of the largest position, portfolio yield, average growth rate or overall portfolio quality. The Ziggma portfolio simulator will help you make the optimal decision by letting you simulate the impact of a trade on your portfolio and calibrate accordingly.

Portfolio simulator

Full circle investment portfolio management

Once you have determined the optimal amount for an investment and executed the trade, you will once again return to portfolio monitoring. You will have gone full circle until market and portfolio dynamics will once again trigger a need for you to take action so that your portfolio stays in line with your investment objectives. The Ziggma platform helps its users to seamlessly navigate the portfolio management and investment research process.

In short: The importance of a sound approach to portfolio management and choosing the best portfolio tracker platform

We cannot stress enough the importance of sound portfolio management. Being aware of this in our capacity as both professional and private investors, we set out to build Ziggma to provide the self-directed investor with a proper set of tools covering the entire investing process. Thanks to Ziggma’s comprehensive portfolio management and investment research offering, Ziggma users benefit in three distinct ways:

  1. Achieve better investment returns
  2. Invest with a greater level of confidence
  3. Manage their portfolios in less time

If you’re not already a Ziggma user, it’s time to join the leading platform for technology-enabled investing solutions for self-directed investors. Let us help you implement a sound approach to portfolio management to achieve your investing goals.

What are you waiting for? Sign up today, and:

  • Track all your investments in one place. Link all your investment accounts for free.
  • Find the best stocks in a matter of seconds thanks to our cutting-edge algorithm-powered stock rankings
  • Benefit from Ziggma’s one-of-its-kind smart alerts to better track your portfolio and portfolio holdings
  • Use the fastest screener in the market to your advantage
  • Track your dividend income and distributions from stocks and ETFs
  • Use the Portfolio Simulator to gauge the impact of a trade on your portfolio
  • Check out our model investment portfolios for new ideas