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Portfolio Strategy - What it is and how to create one

September 30, 2022
4 min read
Michael Porter once said, "strategy is about making choices, trade-offs; it's about deliberately choosing to be different."


Whether in business or life, a strategic plan helps establish a direction for you to take and, along the way, develop the right goals and targets to focus your efforts.

What do we get when we have this sense of focus and direction? Results. 

The same can be said for an investment portfolio strategy.

What’s a Portfolio Strategy?

A portfolio strategy is a set of actions or principles to achieve a specific goal within the financial markets. While the distinct purpose may vary depending on the investor, the purpose of a portfolio strategy is for you to outline the core ethos and principles that will guide your portfolio construction.

While best done during the early stages of investment, building a portfolio strategy is a never-ending cycle of following the markets, revisiting your goals, and making the necessary adjustments.

Understanding Portfolio Construction 

A portfolio strategy is used to guide your portfolio construction. Portfolio construction is the process of understanding how different asset classes, funds, and their subsequent weightings impact the risk and return of an entire portfolio. 

Portfolio construction looks at how individual investments affect your overall portfolio's performance.

Think of your portfolio as a well-oiled machine, moving perpetually to create your income stream. How could you generate expected returns when a cog in the machine, an asset class, fails to work the way you designed?

Introducing Diversification

As a portfolio is a compilation of investments in different asset classes, you must understand the value of broadening your holdings to distinct categories.

More commonly known as diversification, spreading your investments into different categories reduces the risk of exposure to extreme market events. It helps reduce the impact of market volatility on your portfolio over time. 

Diversification acts as a hedge against the variable financial market. By allocating your funds into different baskets, the losses you take in one sector are offset by the profits you make in another. Given that the markets have historically provided positive returns during most years, the likelihood of your losses being more significant than your gains is relatively low.

A diversified portfolio comprises three primary components: stocks, bonds, and alternative investments. Many people will often get stuck on the third component, alternative investments, as this option requires acute awareness and knowledge of investment opportunities.

Why Does Portfolio Strategy Matter?

Aside from guiding your portfolio construction, portfolio strategy matters because it creates a clear direction and provides a driven focus for your efforts.

It allows you to prioritize your endeavors and money into the essential investments for your goal. A strategy in place guides your decision-making process. A well-thought-out plan will enable investors to identify projects and assets better suited to meet their goals and reduces the research time of asset classes needed for your strategy.

Aside from aiming to reap diversification benefits, portfolios intend to grow or maintain wealth. Growing wealth understandably requires a more extensive undertaking of risk than its counterpart. Although, picking either of the two end goals will also call for different day-to-day activities and routines. 

We'll dive deeper into these regimens in later sections of the article.

Portfolio Protection Strategies

When an individual's primary goal is to protect their wealth and maintain the status quo, they may implement some of the following strategies.

1. Diversification

We cannot stress enough the value of having a diversified portfolio. In adding non-correlating assets, one often finds that diversification is a hedging tool against losses as multiple businesses spread the risk you're taking. Not only does it open your portfolio to more sectors, diversification grants the opportunity to reap benefits across industries.

2. Stop Losses

Entering a position without a stop loss is essentially a death sentence. Stop losses are cutoff points that signal the trader to exit a position in light of unfavorable market conditions.

3. Dividend Investing

Dividend investing is the process of investing in a stock for the sole purpose of its above-average dividend yield. To many investors, dividends are secured returns that hedge the systematic risk of investment.

Peccala manifests portfolio protection through the Peccala Medium Risk Strategy. Although it primarily trades crypto perpetual futures, the lack of leverage makes this option great for investors looking for more conservative alternative investments.

Portfolio Growth Strategies

In stark contrast to portfolio protection, portfolio growth strategies aim to increase your working capital by taking on riskier investments that potentially yield higher rewards. Growth is usually defined as capital appreciation and the gradual increase of the value of an investment. While growth can take place in the short and long term, you must know that short-term growth generally carries a higher degree of risk. 

1. Investing in High Yield Growth Sectors

It goes without saying that if you want significant returns, your money needs to go into aggressive high-yield sectors. Growth sectors, such as the startup industry, are known for above-average returns in the market as an offset to taking on greater risk as an investor.

2. Dollar-Cost Averaging

Dollar-cost averaging is a common growth strategy for long-term investors. The process involves periodically purchasing a fixed dollar amount of an asset. Dollar-cost averaging is done to lower the overall cost of the investment, as most shares will be bought when the price declines.

3. Active Investing with Leverage

Leverage trading, when done rationally, is an efficient way to invest in a position even when you don't necessarily have the funds. It involves borrowing money to increase the number of shares you could own without putting up your capital. Leverage is the concept that options traders use to take on multiple million-dollar positions in the markets. While it may exponentially increase the risk, leveraging investment allows you to invest more with less cash - increasing the profit potential. 

While words like "risk" may scare the average investor, let Peccala be the first to assure you that taking on a growth strategy doesn't mean that you'll lose money. With a glass-half-full perspective, a growth strategy, such as leverage, can make you more money when done right.

AI can build a Portfolio Strategy that works

A portfolio strategy is necessary, especially for beginners. Your end goal drives a portfolio strategy - to guide every investment decision you make, for better or worse. You have countless systems to mix and match from, whether for wealth protection or growth. 

Peccala, of course, makes the decision easier by offering two investment strategies specifically for those looking to protect or grow their portfolio.

Invest with Peccala and let market-leading AI decide for you.