The Internet is full of ready-made investing recipes: “buy this”, “hold that”, “this portfolio always works”. The problem is that it really is a well-thought-out strategy depends to a large extent on the scale of capitali.e. how much money is actually working on the market and how much loss we can tolerate without turning the household budget upside down.
It's not that investing is only for the rich – on the contrary, almost anyone can start. But the larger the portfolio, the more opportunities (and more sensible ways of diversification)and the smaller it is, the more important are costs, simplicity and discipline.
How much money does it take to invest? The portfolio doesn't change the market, but it does change the game
Everyone sees the same companies, the same bonds and the same indices. The difference is how much mistakes “hurt” and how easy it is to build a portfolio that has arms and legs. For small amounts, commissions, spreads and currency conversion fees are important or simply the fact that sensible diversification requires several or a dozen items, and each transaction costs money.
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On the other hand with large amounts, other problems arise: there is an increasing need for formal risk management, tax and liquidity planning, and sometimes even… market restrictions.
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What for an investor with 10 thousand PLN is a “click”, for someone with PLN 1 million it is a decision whether entering and exiting a position will not move the price or create too much risk concentration in one place.
In practice, the size of the portfolio affects three things at once:
- first of all on diversification (how many asset classes and how many instruments make sense)
- secondly on costs and efficiency (will frequent transactions eat up the profit)
- thirdly on horizon and resistance to landslides (won't a 20-30% drop force panic selling at the worst moment)
How much do you have for investment? Three leagues of investors
What might the simplest, practical division of investors by portfolio thickness look like?
He is in the first league small investor – e.g. up to approx. 50 thousand PLN of investment capital (i.e. not counting the safety cushion). Its biggest limitation is the cost of errors and the cost of “fiddling around”. If such an investor builds a portfolio of a dozen or so exotic items, he will easily overpay on commissions, currencies and spreads, and also loses control over the risk.
On the other hand, it has a great advantage: it can focus on simplicity and consistency, using broad exposures (e.g. index funds/ETFs), regular payments and rare rebalancing. For a small investor, it is also crucial to separate investing from everyday finances: without a stable financial cushion, even the best strategy may fall apart because life will force the sale of assets at an unfavorable moment.
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The second league is medium investor — approximately 50-500 thousand zloty. This is where diversification becomes truly achievable: you can sensibly divide your funds between different asset classes, currencies and regions, and at the same time the costs of individual transactions are no longer so severe.
However, access to certain markets remains a limitation (e.g. private investments, private placements or some alternative instruments) and the fact that one mistake can still hurt – only on a larger nominal scale. In this group, the importance of portfolio “hygiene” is also growing: concentration limits (so that one company or one topic does not dominate the result), a rebalancing plan and a cool approach to currency risk.
The third league is large investor — let's say over 500 thousand. zloty. His greatest opportunity is that he can “buy” stability: diversify widely, build bond strategies to meet future cash needs, divide the portfolio into parts with different functions (security, growth, liquidity) and – if necessary – reach for more specialized solutions.
At the same time, the requirements are also growing: a larger portfolio forces you to think about taxes (even about using the available limits of retirement accounts), about succession, about rare but severe risks (so-called tail risk), and sometimes also about whether it is worth “systematizing” some decisions so as not to make them with emotions.
The size of the portfolio is one of the key parameters of the strategy, but not the only one. Equally important are: time horizon, income stability, financial cushion, slip tolerance and goals (retirement, own contribution, children's education, security). Therefore, instead of asking on the Internet “what to get into?”, it is better to start with the question: “how long can I freeze my capital, how much loss can I endure and how much will I pay for implementing the plan?”. Only then are the instruments selected – not the other way around.
Note: The information contained in the text is for informational purposes only and does not constitute an investment recommendation, information recommending or suggesting an investment strategy within the meaning of applicable regulations, or any other form of advice regarding the purchase or sale of financial products.
