EFFECTIVE TOOLS OF A PRIVATE INVESTOR AND THEIR ROLE IN FORMING PORTFOLIO STRATEGIES

ABSTRACT

The article is devoted to the study of the instrumental framework of portfolio investments in the context of forming rational behavior of private investors. The theoretical foundations of the portfolio approach and its role as a systemic strategy for managing risk and return are revealed. The content of the main stages of the investment cycle is clarified, each of which corresponds to specific analytical, technical, and managerial tools. The groups of instruments that ensure the creation of an effective investment portfolio are identified, including analytical tools, methods of technical and fundamental analysis, and risk management instruments. Conclusions are drawn about the integration of analytical and risk management tools as a key condition for rationalizing investment behavior and improving portfolio strategies under market uncertainty.

АННОТАЦИЯ

Статья посвящена исследованию инструментального обеспечения портфельных инвестиций при формировании рационального поведения частного инвестора. Раскрыты теоретические основы портфельного подхода, его роль как системной стратегии управления риском и доходностью. Уточнено содержание этапов инвестиционного цикла, каждому из которых соответствуют определенные аналитические, технические и управленческие инструменты. Выявлены группы инструментов формирования эффективного инвестиционного портфеля (аналитические средства, методы технического и фундаментального анализа, а также инструменты риск-менеджмента). Сделаны выводы об интеграции инструментов анализа и управления риском как условии рационализации инвестиционного поведения и улучшения портфельных стратегий в условиях рыночной неопределенности.

Ключевые слова: портфельные инвестиции, риски частного инвестора, инвестиционные инструменты в портфельных инвестициях, риск-менеджмент, управление инвестициями частного инвестора.

Keywords: portfolio investments, private investor risks, investment instruments in portfolio management, risk management, private investment management.

Introduction. The current state of the global financial market is often characterized as highly volatile, information-saturated, and, undoubtedly, emotionally charged. The growing number of private investors observed over recent years not only reflects the trend toward democratization of access to investment instruments but also determines the increasing individual responsibility of private investors for their financial decisions. At the same time, the level of investors’ awareness, their psychological readiness, and their ability to rationally assess risks often become the decisive factors in the effectiveness of their investments. As noted by I.V. Ivanitsky and V.A. Tat’yannikov, under conditions of market uncertainty, the balance between rational and irrational approaches to decision-making in investor transactions tends to shift toward behavioral attitudes [1]. In other words, emotional and cognitive factors can significantly influence the outcomes of even formally logical strategies employed by private investors.

One of the manifestations of such irrationality is the phenomenon of “investor sentiment”, described by R.V. Kovalev as a set of psychological factors (such as impulsiveness, risk propensity, and others) that influence the dynamics of security quotations and the collective behavior of market participants [2]. In this context, market dynamics become not only a reflection of objective fundamental parameters and economic processes but also a result of collective emotional reactions—particularly evident during periods of crisis fluctuations or information surges. The psychological component of investing thus becomes one of the main sources of uncertainty, which, in turn, increases the importance of promoting tools capable of neutralizing subjective distortions—an issue that lies at the core of the present study.

In particular, the most effective way to reduce the influence of irrational factors is the transition from spontaneous reactions to structured capital management based on the principles of portfolio investing. Portfolio investments make it possible to develop a strategy that takes into account the investor’s risk level, investment objectives, and time horizon, thereby enabling control over returns and compensation for market distortions. At the same time, the formation and optimization of an investment portfolio are impossible without the use of appropriate instruments; their systematization represents a relevant direction of research that can contribute to the development of concepts and issues related to enhancing the efficiency of private investments.

The aim of this study is to identify the effective tools available to private investors and to examine their role in the formation of portfolio strategies.

Research methodology. The theoretical foundation of this study is based on the works of scholars in the field of portfolio investments, which examine various strategies, portfolio types, and instruments for enhancing their effectiveness. Particular importance was given to fundamental research in the field of investments (classical investment theory), which made it possible to specify the scientifically grounded characteristics of working with private investor instruments in contemporary conditions. The research methods employed include theoretical analysis, description, synthesis, generalization, systematization, and modeling.

Results and discussion. When considering portfolio investments, it should be noted that they represent a form of capital allocation in which funds are distributed across various assets (stocks, bonds, derivatives, funds, and other financial products) with the aim of achieving an optimal balance between risk and return. The portfolio approach focuses on diversification, risk reduction, and income generation; it thus becomes not merely a strategy but a philosophy of capital management, based on systematization, forecasting, and balancing the probability of losses against target outcomes.

As E.N. Sevumyan rightly points out, the development of classical portfolio theory traces back to the work of H. Markowitz, who first proposed a quantitative approach to optimizing the structure of investments by taking into account their correlation and return variance [3]. Since the emergence of the portfolio investment model, the concept of diversification has become a fundamental principle of modern investment practice. Accordingly, an investor should not concentrate funds in a single asset but should aim to construct a portfolio in which the risk of individual investments is offset by the returns of others. Thus, the primary objective of portfolio investments is the minimization of overall risk while maintaining a predetermined level of return.

From the perspective of a private investor, portfolio investments allow not only for risk management but also for the adaptation of investment strategies to individual preferences and characteristics, such as the level of financial knowledge, risk tolerance, investment time horizon, and objectives. As noted by A.I. Kovalchuk and E.A. Razumovskaya, the lack of preparedness among novice investors often manifests in an insufficient understanding of the relationship between risk, return, and investment duration, as well as in a tendency toward short-term speculation rather than long-term investment [4]. This frequently leads to inconsistent results and, not infrequently, emotional burnout. Consequently, a segment of investors loses capital due to speculative and spontaneous actions, as well as the absence of a clear and implementable investment strategy. Therefore, the adoption of portfolio investment principles fosters the development of systematic thinking and long-term vision among private investors, enhancing their financial competence and confidence in their decision-making.

Special attention should also be given to the well-known advantages of portfolio investments, which correspond to their conventional typology (Fig. 1):

Figure 1. Types and advantages of portfolio investments, compiled by the author

In this context (within the specified system of portfolio investments), the tools available to a private investor become an intermediary factor in the interaction between a well-founded portfolio type and the methods used to manage it. These tools enable the full realization of the advantages of portfolio investing. On the other hand, the choice of a specific portfolio type—conservative, balanced, or aggressive, each associated with a certain level of risk and potential return—is determined by the individual characteristics of the investor. According to E.N. Sevumyan, portfolio optimization does not consist in achieving absolute returns but in finding a compromise between investment goals and the acceptable level of risk [3]. In this regard, the principle of the efficient frontier, proposed by H. Markowitz, remains the primary decision-making tool, since each combination of assets carries its own risk and expected return, and the investor’s task is to identify the point that ensures maximum efficiency within the given constraints.

Consequently, the modern private investor should view portfolio investing as a means of achieving financial independence rather than as a speculative activity focused on short-term profit extraction. However, as A.I. Kovalchuk and E.A. Razumovskaya rightly note, a low level of financial literacy leads to errors in portfolio construction, manifested in the misassessment of risk, neglect of the investment time horizon, and overestimation of short-term market fluctuations [4]. Therefore, portfolio formation depends both on the availability of analytical tools and on the private investor’s fundamental knowledge in the fields of financial and investment planning.

It is precisely here that the role of private investor tools in portfolio formation becomes apparent, which is clearly illustrated in accordance with the portfolio investment process (Fig. 2):

Figure 2. Portfolio investment process, compiled by the author

Let us now consider each stage of portfolio investing in greater detail:

1. Stage of the idea. The idea represents the starting point of an investment strategy, through which the concept is formed and the portfolio objective is determined (capital preservation, value appreciation, passive income generation, or risk hedging). At this stage, the “conceptual” tools of a private investor are employed:

•  investment calendars and analytical reviews, which allow for the assessment of macroeconomic conditions;
•  financial planners and applications, which enable the investor to set the investment time horizon and the acceptable level of risk;
•  market sentiment indices and behavioral indicators, which help to understand the emotional climate among investors and identify potential entry or exit points.

As K.K. and V.K. Charakhchyan note, an investor’s awareness and timely reception of news signals have a direct impact on the market valuation of assets, and consequently, on the formation of investment ideas. In situations where the market becomes sensitive to corporate events, the qualitative filtering of information acquires strategic importance. At the same time, modern digital news aggregators, platforms for analyzing corporate publications, and event-tracking tools help reduce the risk of emotional reactions to information surges and facilitate a rational search for investment opportunities [5].

2. Stage of analysis. After the idea has emerged, the investor proceeds to its validation using tools of technical and fundamental analysis, which include software platforms and services for visualizing asset dynamics (TradingView, Finviz, MetaTrader), as well as analytical modules provided by brokers and banks that evaluate P/E, EV/EBITDA, and ROE multiples, discounted cash flow models, and ratio tables. It should be understood that the impact of news flows on stock prices is event-driven, as some corporate decisions are immediately reflected in prices, while others may be ignored by the market. Therefore, the chosen analytical tool must take into account both quantitative and qualitative factors, such as the news environment, participant expectations, and the issuer’s fundamental indicators.
3. Stage of decision-making. Decision-making represents one of the most critical stages, during which analytical data are transformed into action. The main tools used in this stage include risk-return models, correlation matrices, and volatility indicators; based on this information, the investor selects the portfolio structure and sets the proportions between asset classes. As Y.V. Veld-Merkoulova notes, portfolio selection depends not only on expected returns but also on the investor’s time horizon, which determines the acceptable level of risk. Consequently, investors with a short horizon tend to construct portfolios with a high share of liquid assets, while long-term investors include riskier instruments in pursuit of higher potential returns [7]. To support decision-making, tools such as VaR and CVaR calculators for loss assessment, scenario modeling services, and platforms for automatic construction of the efficient frontier according to H. Markowitz’s methodology are typically employed.
4. Stage of execution. Execution involves the implementation of the investment decision, i.e., the purchase or sale of assets, as well as the allocation of capital among the selected positions. Modern tools that support this stage include online platforms and robo-advisors (which allow for automatic asset allocation according to specified parameters), broker APIs for direct integration of analytical models, and algorithmic strategies (which minimize the influence of emotions and human errors). Execution depends less on technical means and more on adherence to risk management principles (position limits, stop orders, and liquidity rules). Private investor tools, in turn, help maintain discipline and prevent panic reactions during short-term market fluctuations.
5. Stage of control. Control is the feedback phase aimed at monitoring results and evaluating the effectiveness of decisions made. The main control tools include dashboards, performance indicators, broker reports, and financial trackers, which allow for the comparison of actual results with planned targets and the monitoring of the news environment (to enable timely responses to changes in the macroeconomic landscape). Essentially, each security is subject to a unique set of informational factors, making effective control impossible without qualitative data interpretation. The combination of information systems and expert assessment enhances the accuracy of adjustments and maintains manageability even amid high market turbulence.
6. Stage of optimization. This is the final stage, aimed at enhancing portfolio efficiency through rebalancing, adjusting asset weights, and correcting the risk profile. Optimization tools include rebalancing modules on investment platforms, analytical services that track deviations of the actual structure from the target, and forecasting models that propose alternative asset allocation options. A long investment horizon generally implies periodic portfolio optimization, as changes in macroeconomic cycles and the investor’s individual objectives require portfolio adjustments. Optimization simultaneously completes the portfolio and serves as the foundation for the new “Idea” stage (subsequent strategies are formed based on the obtained data, priorities are refined, and the quality of forecasts is improved), making the portfolio investment process cyclical. Thus, the process of portfolio formation can be considered a closed system, in which each stage is supported by a set of digital, analytical, and organizational tools (Fig. 3):

Figure 3. Author’s typology of private investor tools in portfolio formation, compiled by the author

Based on Fig. 3, each of the presented tools occupies its own place within the system of decision-making by a private investor and portfolio formation [6; 8]; moreover, today many of these tools are available online through Internet access technologies. In fact, the modern private investor possesses a wide array of instruments necessary for comprehensive management of the investment process.

Conclusion. Thus, the effectiveness of a portfolio strategy directly depends on the tools employed by the investor at each stage of the capital management cycle. Analytical tools provide a foundation for informed decision-making, thereby transforming the subjective perception of the market into a structured set of data; technical analysis tools help to understand short-term movements and entry points, while fundamental analysis assists in assessing the intrinsic value of assets and their long-term prospects. Risk management tools serve as the “coordinate system” of the entire strategy, enabling the limitation of losses, regulation of volatility, and maintenance of portfolio stability despite external fluctuations.

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