Academy
  • Log in
  • Sign up
  • StockWatch
  • Lobby
  • Academy
  • Investing
    • Planning Your Investments Setting investment goals
    • 8 Steps to Financial Freedom
    • How to Get Out of Debt
    • Dollar Cost Averaging with Example Calculations
    • Which Credit Card Should I Get?
    • Can I Retire on 1 Million Dollars? Is it Enough?
    • Investment Vehicles Best way to invest your money?
    • How to Budget Your Money
    • Choosing a Finance Advisor
    • Asset Classes: Shares, property, fixed interest
    • The Magic of Compound Interest
  • Shares
    • Stock Market Investing and Share Market Tips
    • Short Selling Explained: What is Short Selling
    • How to Trade Like a Professional Trader
    • What are E Minis Futures? How do I Trade Them?
    • Diversification Learn how to diversify your portfolio
    • What Is Ethical Investing?
    • Creating a Trading Plan
    • The S&P/ASX 200 Index (XJO)
    • Choosing A Broker
    • Guard Your Portfolio With Defensive Stocks
    • How Much Do I Need To Invest In Shares
    • Investing VS Trading
    • What does ex dividend mean? How to ensure you receive your dividends
    • If I Could Only Invest In One Thing...
    • What Are Shares Dividends?
    • Dividend Imputation System & Franking Credits Explained Calculations
    • What is the 'Market'?
    • What Shares Should I Buy?
    • How to Buy Shares, placing an order
    • Building a Investment Portfolio Strategy
    • Trading the ASX 200 Index: ETFs, CFDs, Futures and Options
    • Creating a Trading System
    • Understanding the Share Language & Jargon of the Share Market
    • What are Income Stocks? Best Income Stocks for 2010
    • How To Pick Growth Stocks?
    • Wesfarmers (WES) vs Woolworths (WOW)
    • David Jones (DJS) VS Myer (MYR)
    • Benefits of Investing in Shares
    • How to Make Money In Shares
    • How to Treat Trading Like a Business
    • BHP vs RIO
    • Making Money In a Bear Market
    • Investing in Cloud Computing Stocks
    • High Dividend Stocks
    • Make Money Trading the Share Market
    • ANZ vs CBA vs NAB vs WBC
  • Funds
    • Managed Funds Choosing the best fund for you
    • S&P/ASX 200 ETFs: STW, IOZ, VAS
    • Managed Funds or Direct Shares
    • ETFs (Exchange Traded Funds)
    • Introduction to Index Funds
    • ETF Trading
  • Fundamental Analysis
    • Fundamental Analysis of Stocks: Qualitative Factors of the Company
    • Fundamental Analysis of Stocks: Qualitative Factors of the Industry
    • Fundamental Analysis: Quantitative Factors, Book and Price to Book Ratio
    • Fundamental Analysis: Quantitative Factors, Earnings Per Share (EPS)
    • Fundamental Analysis: Quantitative Factors, Price to Earning (P/E) and PEG
    • Fundamental Analysis: Quantitative Factors, Short Interest
    • Warren Buffett: A genius investor, a philanthropist, and a role model for citizens
    • Benjamin Graham: Father of value investing
    • Phillip Fisher
    • Peter Lynch
  • Technical Analysis
    • Charting
      • Technical Analysis: Charting: Line Chart
      • Technical Analysis: Charting: Bar Chart
      • Technical Analysis: How to Read a Candlestick Chart
      • Technical Analysis: How to Read Point and Figure Charts
      • Technical Analysis: How to Draw Trend Lines On A Stock Chart
      • Technical Analysis: What are Stock Gaps & How to Trade Them
      • Technical Analysis: How to Read & Trade Chart Patterns
    • Technical Analysis: The Secret of Moving Averages Explained
    • Learn How To Trade Support and Resistance Levels
    • Technical Analysis Indicators: Leading versus Lagging Indicators
    • Trend Following Indicators Part 1: What Is a Trend?
    • Trend Following Indicators Part 2: Trading The Average Directional Index (ADX)
    • Trend Following Indicators Part 3: The Directional Movement Index (DMI)
    • MACD Indicator Explained
    • Technical Analysis Momentum Indicators: ROC, Stochastic & RSI
    • The Relative Strength Index RSI Indicator Explained
    • Stochastic Indicator Explained
    • Momentum Following Indicators: The TRIX Indicator
    • Volume Following Indicators In Technical Analysis
    • Volume Indicators: On Balanced Volume (OBV) Indicator
    • Volume Indicators: Money Flow Index (MFI) Indicator Explained
    • Volume Following Indicators: Percentage Volume Oscillator (PVO) Indicator
    • Technical Analysis: Parabolic Stop and Reversal (PSAR) Indicator
    • Technical Analysis: Stop Loss & Trailing Stop Loss Orders
  • Commodities
    • Should I Invest in Gold? Pros and Cons of Precious Metal Investing
    • Should I Buy Gold Now?
    • Investing In Silver 7 Methods to Gain Exposure to Silver
  • Day Trading
    • Common Day Trading Myths and Lies Debunked
    • Day Trading Rules Part 1: Setup Long
    • Day Trading Rules Part 2: Setup Short
    • Buying and Selling With the Trend
    • Day Trading: The Art of Controlling Your Emotions Part 1
    • Day Trading: The Art of Controlling Your Emotions Part 2
    • Intermediate Setups and Creating a Bias Part 1
    • Intermediate Setups and Creating a Bias Part 2
    • The Art of Channel Trading
    • Day Trading Example: Walking Through a Trade – Part 1
    • Day Trading Example: Walking Through a Trade – Part 2
    • Can I Make Money Day Trading? How to Become a Day Trader?
    • Tracking the Market and Day Trading Your Stock
    • High Frequency Trading
    • What is a Trading Robot? Should I Use One to Trade?
  • Forex
    • How to Trade FOREX – Beginners Guide
    • Trading Forex
  • Derivatives
    • Options
      • Options Trading: Call Options Explained
      • Options Trading: Put Options Explained
      • Options Trading: Why Trade Options?
      • Components of an Option
      • Understanding Option Pricing Fundamentals
      • Options Trading Examples
      • Options Trading Strategies
      • Options Trading Risks
      • The Covered Call Strategy
      • Trading Options Seminars: What You Will Learn in a Teaser Seminar
    • CFDs
      • What are CFD's? Why Trade them?
      • CFD Types: Direct Market Access (DMA) VS Market Maker (MM) The Pros & Cons
      • CFD Margin Requirements Initial and Variation Margin.
      • CFD Trading: Calculating Overnight Interest Payments (Financing fees) with example
      • CFD Trading: CFD real life examples with calculations (Long & short)
      • The Pros & Cons of Trading CFDs
      • CFD Trading Risks: Learn the risks associated with trading CFDs
      • How to Choose the Best CFD Provider for You
      • CFD Trading Top 5 Trading Mistakes
      • CFD Tax Treatment
      • Learn How To Trade CFDs: Developing a system that should make us money
      • CFD Trading Example Flight Centre (FLT)

Building a Investment Portfolio Strategy

  1. Articles
  2. Shares
  3. Building Stock Portfolio
16 October 2015
ยท
5 min read

One of the keys to profitable investing is stock selection. It does not matter how intricate the strategy is to buy and sell, if the stocks themselves are duds you will lose money. But what is the basis for stock pick selection? Which shares should you buy?

Why Have a Portfolio?

Before we build a portfolio we need to ask the question as to what a portfolio is and why we should have it at all. An investment portfolio is simply a group of stocks that you hold. A minimum portfolio size would be two stocks. But why not invest solely with one good stock?

The stock market is very diverse with many unknown factors. One could compare it to a garden full of vegetables. If you wanted to be sure to have food to harvest in the fall despite differing bugs and insects that attacked different crops, what would you do? If you planted only one crop, perhaps corn, the possibility lies that a corn eating pest could wipe out your entire crop. Only by diversifying can you protect the goal of having food to harvest.

The stock market is no different. For unforeseeable reasons the market may go up or down and this will have varying effects on different stocks. Some growth stocks may plummet in a bear cycle while other stocks such as ones based on gold may actually go up. To protect your portfolio with the goal of financial security, you need to have a variety of investment products.

Must Follow Portfolio Rules

Before we even begin to think about which stocks would make suitable candidates based on our trading psychology, we need to cover some basic trading principles that need to govern our portfolio creation. In no particular order here are the rules:

  1. Quality stocks with strong fundamentals
    We are in this for the long haul. Picking penny stock might be great for some sideline speculation but for our portfolio to achieve financial security we want sound stocks that can weather hurricanes.
  2. Diversification
    We are talking about stocks in different sectors, but also diverse in the amount of stocks. Many experts say that 10 to 12 stocks is the base for a good portfolio. Our goal is to have a substantial toehold in a few different types of markets so we can prosper from the varying cycles. Of course, we do not want to spread ourselves too thin. We will diversify as much as our capital will allows us to have a meaningful position in each stock.
  3. Entry and Exit Strategy
    The point of this article is not to give technical analysis. But we should definitely have a plan of when to take profits, when to sell even if at a loss, when to invest in new stocks, and when to go to cash. A simple system is to trade with the overall market trend. Complex systems might use numerous technical analysis tools in tandem. Our portfolio should have some stability and not be a day trading account, but still have flexibility to maneuver with the changing markets.
  4. Portfolio Expectations
    Building a portfolio should be made with a long term goal. While it might be a fanciful idea to double your investment every year with some very high risk methodology, this should not be the basis for our expected portfolio return. We need to pick realistic targets. If our returns fight inflation and beat other investment products we should be content. We are building a portfolio for tomorrow not today.

Building a Customized Portfolio

Portfolios do not come with a cookie cutter to make a prefabricated basket of stocks suitable for every investor. First we need to analyze the investor and then select stocks that match the profile. To do so we need to consider three main areas: time, risk, reward.

Time: how long do you plan to hold this portfolio? Do you plan to convert it to cash when your kids enter college? Is it a retirement portfolio? Are you planning to hold for five years or 35 years? This will greatly influence the type of stocks you select. As well, the age that you are also is a factor. If you are younger you might pick a different set of stocks than if you are retired and want your portfolio to remain stable.

The length of time and your age are major factors in stock selection. In general, the younger you are the higher risk you can assume. The longer you have to pick stocks the more fundamental factors will come into play.

Risk: how much risk are you willing to assume? All three factors of time, risk, and reward are closely related. If you are younger you can assume more risk. But that doesn’t mean you should. A careful analysis of your psychological profile will reveal if you have the stomach for high risk. Before you run out to see a psychiatrist, ask your spouse how you perform under stress. Or how do you feel when your home value falls in half? Do you take it in stride confident that it will soar in the future or do you lose sleep and incessantly worry? This may be a clue as to whether your portfolio should have high risk stocks and to what degree.

Return: what sort of return do I want and need? Most will want fantastic gains. But let us be realistic… the ASX as tracked by the ASX 200 index had an average annual return rate of 3.5% from 2002 until the beginning of 2010. Granted we also experienced a horrific drop in 2008, but this is how investing works.

A return should at least beat inflation by a few percent per year or we should simply give our money to the banks for long term deposits. A long term investment of 10 to 15 percent per year is a good target to shoot for However, lower risk might mean lower rewards of 5 to 6 percent after inflation. Of course, the return target needs to be adjusted based on our age and penchant for risk.

Adding Stocks to the Portfolio

Now that we have some idea of the time frame to hold, risk we are willing to take, and realistic returns we want, we can now pick stocks to match these criteria. There are two major types of stocks that we will be looking at: growth and income.

Growth implies primary appreciation of the share price while income stocks rely more heavily on dividends to create a cash flow. Our expectation for overall profitability with growth stocks might be around 7 - 10 percent per year, and closer to 5 or 6 percent when discussing income stocks. Of course this is after inflation. How do we use these different stock categories to create different portfolios customized to our needs? That answer will be highlighted in the next two accompanying articles.

shares
You May Also Like
  • What are Income Stocks? Best Income Stocks for 2010
  • Asset Classes: Shares, property, fixed interest
  • Planning Your Investments - Setting investment goals
  • How To Pick Growth Stocks?
  • Warren Buffett: A genius investor, a philanthropist, and a role model for citizens
About Privacy Contact v2.0.1
© 2025 The Domain Publisher Pty Ltd.
This website uses cookies to ensure you get the best experience on our website. Learn more about cookies