The stock market can be a little nerve-racking at first for new investors, but with a good portfolio you are likely to have great long-term results and more than that without paying a broker a single dime. This is not rocket science, but there are a few things to know that you should keep in mind while doing this exercise. Most mistakes done by newbies are usually because they follow nonsense pieces of advice instead of really thinking about it by themselves.
So here is a little no-bull-shit “Stock market portfolio designs 101” article for your consideration.
First, set the target!
On the long run, 7 to 9% a year, compounded, is the kind of profit that you can expect in average for having a stocks portfolio managed by a professional manager or a package put together by your bank. I include here the commissions, bank and broker fees too. Of course, some of their best stocks can go up to 35% in one year, but that would surely not be the case every year, and anyway, it is counter balanced by another stock in your portfolio that might be at -10%. Having said that, 7 to 9% profit a year is a rather realistic value to go with.
If you don’t have time to choose and manage your stocks, but you still want to do it all by yourself, you can just buy an index like S&P500 which should give you a very middling result that can serve data representative of the market.
If you put the effort in your activities, do your research, pick-up good stocks and manage them closely by yourself, you can expect to get a good 12 to 15% profit compounded overtime, which is only slightly higher than the average but will surly surely make a big difference when compounded over the years.
10 000$ in capital + 100$ each month at 9% annual return compounded over 20 years will give you 120 390$
Now, 10 000$ in capital + 100$ each month at 15% annual return compounded over 20 years will give you 296 373$
More than double!
How many stocks should I pick?
How many stocks should I have in my portfolio? There is not a single magic number that works. The best is to buy as many stocks as you can over the years that you have discovered to yield great opportunities.
You don’t need to diversify for the sake of diversifying, because that would be foolish. As time goes by, you will discover different business opportunities that will eventually lead to the diversification of your portfolio anyway.
It is something that comes as a result of researching and experimenting with the market by yourself.
You can have 1, 5, 10 or 50 stocks! It will ultimately depend on how much money you have to invest and how much time you have to research and manage them. Generally speaking, the more stocks you have in your portfolio, the greater the chance you have to score big!
You know, those kinds of big hit that bring you 10x your investment within 3 years. Those are the scores you should aim for.
Also, the more stocks you follow, the more elasticity you will have to move your money around and between them in order to rebalance your stocks depending on the economic circumstances.
Read: The smart way to invest in stock market for the Average Joe:To know more about how to find great stocks.
Disperse your investment
Dispersing your money in different categories is a strategy used to reduce risks. Supposing that you have done your research properly and then have bought the stocks at a good price, which is a low price, you are already minimizing the risk, but we should not forget the value of having different kind of stocks in place.
Here are 5 simples categories in which I balance my investments depending on what’s happening in the world.
The slow-mo’s are those fat-asses who are literally moving in slow-motion compared to everybody else, they are following the inflation at around 3% a year. In the past they might have been super-duper’s, but they have now reached their maturity and are pretty much on the cruise control.
They are usually very low risk and they often pay regular dividends. Like some big banks, for example. You can have a couple of those to secure your portfolio, and automatically reinvest the dividend to buy more and more stocks. Those could become good at retirement, if you have them in large amounts!
I personally have around 10% of my stocks in that category. But this might change in the future as I could change for a dividend oriented strategy to finance my golden years.
The regular’s are those guys who have been around the block since a while now like Coca-Cola or Procter & Gamble that can still give a solid 9 to 13% a year. They won’t make you rich because their size prevents them from moving up fast enough, but they are a solid conservative choice for a long term strategy that would help your portfolio to survive recession. Large super market suppliers and some big pharmas are part of this category. We will still need to eat, drink, sleep and take our medicine even if the economy sucks!
I personally have around 20% of my stocks in that category.
Those companies are growing and they are doing it fast! You can surely hit 20 to 30% a year and that for a couple of years in a row with those. More risky than the 2 previous categories, this is definitively the most exiting one. This is where the hot & sexy chicks are going and where the money is made. One or two great hits in this category can make your career as an amateur investor.
They are usually small, relatively new but aggressive and agile enterprises that aim to conquer their market with a new innovative or trendy product.
They don’t really need to be in a fast growing industry as long as their product stands out and takes over the market by surprise!
Again read my post on how to choose a stock to spot and buy those babies at the right time.
I personally have around 40% of my stocks in that category.
Those are the companies who are literally coming back from the dead. They got smashed by an economic incident or something else and might just not make it. If you think they will survive the catastrophe, buy them at their lowest and make profit as they go back to their normal price.
I remember Delta Air Lines was in big trouble a few year ago when they when down at 4$ during the great recession of 2007-2009; well, they climbed back to 50$. This is good stuff, 12x growth in 5 years. They are easy to spot in time of recession.
I personally have around 30% of my stocks in that category.
There is no perfect way to manage the risks and benefits of your portfolio, but, by customizing a portfolio that suits your needs and temper, you can still have the trills and hit the jackpot while staying relatively safe and have a good night of sleep. Be sure to keep one thing in mind while building your portfolio: there will surely be some high profits but there will also be some low ones. Stay positive even when the market crashes, and when it does, don’t sell; Quite the contrary. It’s the perfect time to buy more of your favorite stocks! So keep enough cash out of the market for when that day happens!
If you are beginner at stock market investing, I can’t recommend you enough to first invest a little bit of your time into reading this excellent book on the subject, Learn to Earn: A Beginner’s Guide to the Basics of Investing and Business by Peter Lynch, before investing your hard won money! Starting with this book will give you strong basics that will prevent some catastrophe! Also available in Audio!
If you are already playing the game and want to bring it to the next level, I then strongly recommend you The Five Rules for Successful Stock Investing: Morningstar’s Guide to Building Wealth and Winning in the Market. In this book, the author will explain how to do it like a pro! Everything you need to know to go from gambling on stock to investing in a company! From taking risk blindly to analyzing, calculating and understanding what is really going on!
Until next post.
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