A strategic approach towards building a stock portfolio
The world of investing can be complicated for an individual investor. There are several asset classes such as mutual funds, exchange-traded funds, a variety of bonds and fixed-income products, commodities, foreign exchange – and then, of course, stocks.
As increasing number of investors are turning to low-cost ETFs, the question always arises - is it worth taking the time to build a stock portfolio? Industry experts say that if someone is willing to put in some time and research, there are advantages to individual stock ownership.
So, what is the strategy that an investor can use to get started picking the companies that go in their stock portfolio? It basically comes down to four important points.
Invest in some study time: Building a solid stock portfolio is going to require some time, research, and homework. Be prepared to be patient, understand your investing personality, and choose companies that you understand and easily grasp the business model.
Develop a plan and take a long-term view: Industry experts say that an investor should have at least three to five years of time frame as part of a long-term view. The longer the better to lessen the inevitable volatility.
Use parameters when choosing stocks: Set up a list of a parameter that is important to evaluate the companies and then shortlist the companies that meet those criteria.
Diversify with 10 to 40 individual stocks: There are 10 stock sectors classified by S&P Dow Jones indices. These include energy, materials, industrials, consumer discretionary, consumer staples, health care, financials, information technology, telecommunication services, and utilities. As a rule of thumb, you would like to own two to four of the top performing companies in each major sector to get the optimal mix in your portfolio.
Now all that is great. But does it really work?
At Investify, we look at many different strategies by analysing the data, doing the number crunching, and testing our hypothesis by creating a model portfolio of stocks that meets certain criteria.
One such experiment we did recently was with a list of 35 stocks that satisfied our 5 Star conditions as on 21st May.
We have been tracking the performance of this portfolio since May (just after our launch) and we were delighted with the result. On a month-on-month basis Our 5 Star Portfolio has consistently beaten both the ASX 200 and NZX50 Index.
During the 5-month period (between 21st May and 22nd October 2021) the equally weighted portfolio consisting of 13 Large-cap, 17 Midcap, and 5 Small-cap stocks of ASX & NZX listed companies had a price return performance of 9.02% (before dividend payout, fees, and taxes) compared to 5.48% for ASX 200 and 3.75% for NZX50.