Investing in the stock market invariably involves the risk of losing money. To minimise these, investors use three types of analysis - technical, fundamental and portfolio. For optimal results, it is best to use all of them. However, the first two are complemented by portfolio analysis - how?
Portfolio analysis - what is it?
Long-term investment on the stock market requires fundamental analysis. This involves examining a company's long-term situation. If the share price is stable, the company is considered worth investing in due to the high probability of stable, although not always high, returns. In contrast, technical analysis is used in short-term investment decisions. The interested buyer examines the upward and downward charts of a particular brand and, on this basis, determines the most opportune times to sell and buy the shares.
Both methods come in handy when using portfolio analysis. It allows the construction of a portfolio, or in other words a portfolio of products that is tailored to the needs and expectations of the investor. It should consist of assets with different rates of return and risk. A model portfolio includes shares in companies with a reputation for stability in the market, as well as those whose fluctuating value can help to make a quick profit (but also involves the risk of losing funds). The investor's overall portfolio should be complemented by other products, such as gold or real estate. 
What is portfolio analysis used for?
The portfolio method is based on the Markowitz model, which is based on the diversification of stock products. Nobel Prize winner in economics, the American scientist Harry Markowitz recognised that one should not build an investment portfolio based on one type of product, e.g. exclusively from high-risk stocks. This method, called diversification, thus makes it possible to survive almost certain future stock market turbulences and crises without being exposed to irreparable losses.
In doing so, it is important to bear in mind that portfolio theory only sets out a general scheme of action. In other words, it is not a pre-prepared scheme showing how much to invest and what to invest in. The Markowitz method involves diversification based on the individual goals of the person buying and selling stock products. Combining it with technical and fundamental analysis gives a good chance of achieving long-term and optimal results. This is extremely important as many investors succumb to emotions contributing to irrational buying and selling decisions.
Portfolio analysis - why is it so important?
Stock markets are often red-hot. Investors' attention is suddenly drawn to a company whose market attractiveness goes beyond the usual competitive interest. In such a situation, the investor concerned also seeks to acquire the product in question, hoping to make a profit.
Is this the wrong attitude? The answer to this question is not clear-cut. Buying shares or other assets with a high risk of changes in value can certainly be part of an investor's strategy. In the first instance, however, he or she should look at the sense of the purchase in relation to the objectives he or she wants to achieve in the long term.
Is portfolio analysis effective?
Portfolio risk is often simply unjustified. Imitating decisions made by other investors can lead to serious losses. What is the reason for this? Unfamiliarity with the entire portfolio of other investors. A person who copies someone else's choices does not know the financial potential of their other products, their high share risk relative to the others, and the timeframe in which they are potentially expected to make a profit.
The relationship between the different elements of a strategy varies. It is for this reason that an investor should never lose sight of his or her own objectives, sometimes succumbing to fads. An effective solution to this problem is portfolio analysis. When putting it together, it is worth using one of several methods. 
Popular portfolio methods
The ways in which portfolios are managed can best be understood from the various matrix models used by investors. One example is the BCG matrix developed by the Boston Consulting Group. It involves analysing the growth and share of a particular company, i.e. screening it for its ability to provide long-term financial benefits.
The BCG model works well for an organisation that is well established in the market and offers a long-established set of products. These are divided into stars, i.e. those generating high turnover, although not always revenue for investors, milk cows, i.e. products that generate profit, question marks with potential that can start to generate profit after investment, and dog tails with no chance of delivering earnings.
The McKinsey matrix, on the other hand, is not so much about checking the company itself, but the whole sector in which it operates. In this model, it is very important that the organisation in question operates in an attractive market area. Of course, its very financial situation, potential and capabilities in relation to its competitors also influence the investment decision.
Many investors also opt for an operating pattern known as an ADL matrix. In this model, what matters is both the ability to compete with other players in a given market sector and its cyclicality. What is important is the number of newly launched products and services in relation to existing ones. This makes it possible to forecast their stock market success. This matrix works well for investments in technology companies, among others. The choice of method influences the nature of an investor's portfolio, i.e. the type of portfolio.
Portfolio analysis - types of portfolios
The profile of investment portfolios can be broadly divided into those of lower and higher risk. The former include, for example, conservative ones. Such portfolios are full of products that are likely to yield a steady but small return. However, their profitability is low. The same is true of minimum-risk portfolios, i.e. filled with investments in shares and other commodities that provide a modest but rather certain income. There is a slightly greater threat of loss with optimal portfolios. In this case, however, there is a good chance of a higher return.
However, an investor's profile can be quite different. Many people choose to create an aggressive portfolio. This offers a high chance of a high rate of return, but at the same time presents the risk of large losses. A similar example is a critical portfolio, where the increased rate of return is linked to the increasing volatility of the product's valuation over the long term. These include MVP (Minimum Viable Product) portfolios, i.e. portfolios that are not yet valuable, but which clients believe may become so.
Adopting the right portfolio method offers the chance of consistent returns. It is worth bearing this in mind and not succumbing to emotions and fads. For in the stock market, as in other areas of life, composure, knowledge and planning are the keys to success.
Choose InPost Subscriptions for businesses and send parcels at a fixed price.
Take one minute to leave your contact details and start sending parcels from as low as 11.89 PLN*.
- One contract for courier and Paczkomat shipments
- Free courier pickups
- Express delivery
- Price guarantee for the duration of the contract
- Fuel surcharge included
- Dedicated post-sale support
* Net price per Paczkomat shipment in the Subscription 600 plan.
Czytaj również
