Our portfolio should be built on a balance of risk vs. returns.

A decade ago, to the average person capital markets seemed too complex to understand and invest in. However, with the increase in access to information available, especially online, more people are better informed and can invest in capital markets.

The participants of the capital markets understood these challenges and they have started offering more suitable and versatile investment products to the public.   

Mobile applications such as Robinhood, who offer features like fractional investing and no brokerage fees, have encouraged a lot of younger investors to invest in these capital markets. Even though it’s a good initiative, the risk of making bad investment decision is still prominent. It is important to remember that investment decisions made based on advice chat forums or vlogs are mostly not based on thorough research and may not suit an individual’s portfolio.

For portfolio building we can look to the Finance Theory that tells us: 

1) We should build a portfolio based upon our risk/return objectives while keeping our constraints in view.

2) Diversify our portfolio to reduce risk.

For a small individual investor this can be a daunting task, if not impossible, because of the detailed analysis requiring expert knowledge and data. However, there are financial products out there which can help these investors meet both objectives. They are called ETF’s (Exchange Traded Funds). As the name says, they can be traded on exchanges just like stocks; except they are like open ended mutual funds, with investments in other instruments. These funds come in wide variety and could be tracking broad market index or be a sector specific ETF. 

They offer the freedom to choose from a whole menu of ETF’s and the way these funds are managed, at a very reasonable cost. For anyone who has limited knowledge of capital markets, ETF’s are an excellent option to explore, and invest in capital markets.