At first glance, one thousand dollars may be considered a small amount for investment. However, in the right hands even a smaller amount of money can bring profit. If we have an appropriate portfolio, it will enable us to gain maximum profit with the help of one thousand dollars.
What assets can we buy for one thousand and what are the prospects for such a portfolio?
There are more assets giving good prospects than many of us think. Traditionally, these are stocks, bonds and a variety of derivatives, such as forwards and futures, which in case of appropriate operations can bring profit both in the medium and long term.
Some beginners wrongly think that in the exchange they can only trade large amount of assets and small amounts are good only for a bank deposit.
It is true that dividends from long-term retention of shares for one thousand dollars are not high (from 1 to 4% per month), and this does not justify risks of falling prices of the shares. But we can choose some other way. We can buy shares or currency and wait until they substantially grow in value.
Let’s call it a speculative portfolio
This is a portfolio in which we will not take into account intermediate risks and dividends. We will pay attention only on assessment of the growth prospects of the assets, which we are going to sell in the right time and receive a profit as the difference between buying and selling prices.
The best portfolio of this kind is a diversified one. That is, we can use different classes of assets; some of them will behave in accordance with the forecast bringing profit (currency), while others will insure the risks of drawdown (shares).
80% of high volatility assets (highly profitable but bearing high risks), most often these are currencies and derivatives contracts, including futures;
20% of low volatility assets (less profitable but bearing low risks), these are shares, bonds and bank deposits.
Mathematical formula of Tobin's portfolio shows that theoretically the yield of such portfolios is from 80 to 90% for two quarters. In practice, it is often 75-80% of absolutely risk-free income, sometimes it reaches up to 85-87%.
Here a lot will depend on economic situation in the countries or union of the countries (in case of the euro) the currency of which is bought for a long-term (usually for three quarters)
A portfolio can look as follows:
Where St Dev — profit from the major assets (currency pairs)
Sharpe ratio is % is the ratio between the level of risk and expected return on these instruments;
Risk-free rate –a percentage from the expected profit and simultaneously the share of risk-free assets in the portfolio, which should realign possible drawdowns of specific currencies;
Currency instruments selected for this portfolio are the most profitable. Unfortunately, Tobian's portfolio is unlikely to bring a profit of higher than 90%.
You can expect to receive only 13-15% monthly with an average return of 80% for two quarters + a 1-4% of dividends on the acquired shares monthly with risks and commissions, which are much lower than in case of a bank deposit.
We would recommend investors to give preference to the shares and bonds versus the bank deposit. You should become an investor yourself. In the bank, your money will be used to create one of the portfolios, similar to what we have done earlier and a significant part of profit will go to the bank traders and professional managers. While, as you could see, an investor does need any special skills for making assessment and creating a portfolio;
The only problem, which an investor may face is a choice of risk-free assets (usually, these are shares). In order to make the correct choice, an investor need to carry out fundamental and technical analysis and evaluate prospects of the companies, which shares he/she is planning to acquire. Usually, it is not difficult to see the prospects of shares for a two-quarter period;
If you do not want to be involved in calculations of Tobin and Sharpe, or mathematical formulas, evaluation or analysis of the stock market yourself, you can entrust this task to specialists of one of the brokerage company, which will make a portfolio for you. Usually, payment for this service is included into the commission for your transactions in open market, so you do not need to pay an additional price.
Tobin diversified portfolio is a bright illustration of the old rule “do not put all eggs in one basket”. However, this strategy is not suitable in case of large investments, so an investor shall think of the other effective portfolios using his/her skills and wits, as the books may be of no use. We believe that you will find your ways as soon as you have big money to use for your investment portfolio.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.