The truth is that just about anyone can build their own share and achieve good returns without too much knowledge or risk.
The key to being successful is to practice good portfolio management.
So how do we do this?
What follows is a practical framework that will not only allow investors to build a profitable portfolio, but ensure they select only stocks that have a higher chance of being consistently profitable.
The list of stocks you select for your portfolio will depend on the time you have available, your resources and the goal of your portfolio.
That said, for most Australians, and other international investors, I'd recommend not straying too far outside the top 150 stocks on the market. Why?
Look at the following reasons:
- The stocks are highly liquid.
- They are all profitable businesses with some of the best managers in Australia.
- The stocks are bought heavily by institutions.
- They generally pay good dividend yields that have good tax credits attached.
- Reliable information about these stocks is much easier to obtain.
- The chances of any one of these companies going broke is small.
- Over a 10-year period these stocks will produce good returns.
This belief not only costs you money, it hinders your ability to generate profits because you are investing your faith in speculative stocks.
In other words, you are speculating that a cheap stock will perform better that a solid blue-chip stock.
You want to buy quality stocks, not quantity, because this is where you will, for the most part, get the greatest returns.
The reality is when you buy cheap you are gambling with your money and taking higher risks.
If you are speculating that smaller stocks will rise faster in a shorter period of time you are taking higher risks, will result in more losses and very average returns.
It has been proven that concentrated portfolios perform better than large portfolios and provide lower levels of risk. I recommend holding no more than five to eight stocks, but depending on the goal of your portfolio you can hold up to 12.
Holding more than 12 stocks will dilute your returns and increase the risks you are taking.
Simply reducing the number of stocks held in a portfolio can dramatically increase investors' returns.
If you take this low-risk methodical approach to investing over the long term, then nine times out of ten, you will achieve far higher returns than if you try to beat the market averages by thinking you can pick the next boom stock.
