Posted on

How to build a stock portfolio

What is a portfolio?

If you google “stock portfolio” you get images of pie charts and lists (and one or another caricature of Warren Buffett). And this is not wrong! But to get to those lists and to understand what they mean, it can be better to start with a definition.

A portfolio is really nothing else than a collection of papers. Ideally, it is papers that have value to you and that represents you. An art portfolio contains art work by the owner, that can be used as a tool to convince people of their brilliance in art.

This is the same with a stock portfolio. A stock portfolio contains stocks (assets, valuable paper) that make up the sum of this persons investments. Of course, a person can have several portfolios, but for small time investors it is most common just to keep all investments in one place, as it is easier to manage that way.

Choosing your players

The portfolio reflects who you are, as a person. It is symbolic of your actions and your thoughts. That doesn’t mean that you should value yourself based on your portfolio – but you should value your portfolio based on yourself! Do not invest in questionable companies – unless you want to. If you don’t believe in environmental change, but hate weapons – go ahead and invest in oil but not in weapons. The choice is yours. You are your own free agent.

Here, you can browse Stocksholm to find the stocks that you like that also have a high rating.

Building a portfolio is as much about understanding the market as it is about understanding yourself. It is the same way as when you choose clothes in the morning or what you want to eat for lunch – it comes down to what you are interested in and what you want to achieve. if you are invested in things you care about and understand, you increase your self confidence in your investment abilities. Still, of course, there are some pointers to what to think about when designing your portfolio.

Good stocks are not necessarily cheap stocks

When you build your portfolio you should aim to buy stocks with good value. There are a lot of stocks out there that are good performers – but because the price is set by expectations of the future, many stocks are not priced at their real value. This means that just by finding good performing companies it is not necessarily true that you can earn money on their stocks. By using our service you can find stocks that have a good value at the right price, with an ongoing upwards momentum.

Diversifying the content

Have you heard of the card game Magic the Gathering? The principle of a stock portfolio is very similar to these kind of role playing games. You will do a lot better if you have a good balanced portfolio with different kinds of companies – and specifically companies with a good chance of returning more money (good stock companies)! Having a good team of several stocks helps you if one or two stocks turns bad. Most professionals recommend that you buy 15-30 stocks. Fewer than that and each stock builds too much risk in your portfolio. More than that and you limit the upside that you could get from good runners.

That you buy stocks in different sectors helps you if one entire sector turns out to lose value in the future. It is also good to buy stocks in different markets and countries, if possible. That way you are protected from country specific drawdowns.

Here you can access our top lists and filters to find the top rated stocks in different sectors.

Rebalance – but not too often

One of the major reasons that people fail to make good returns in the stock market is because they tend to switch strategies too often. This results in a lot of fees for buying and selling, as well as the risk of selling a lot of future winners and buying a lot of new, expensive stocks. people also tend to sell stocks that have lost a lot of value, which does nothing but erode the capital in your portfolio.

A good plan for long term investing is to rebalance once every year. From an emotional stand-point (and investing is indeed very emotional) it is better to not even look at your portfolio between those times. But, of course, if you save monthly, you should add stocks that fit your current portfolio from month to month.

When saving monthly you should still keep to the principles above – use our top list, diversify the content, but stick to a total of maximum 30 stocks.

Summary

  • Use our service to buy value stocks with ongoing momentum
  • We recommend that you buy 15-30 different stocks
  • Buy stocks in different sectors
  • Buy stocks in different markets or countries
  • Rebalance once every year – but save monthly if you can

Read more about our portfolio construction philosophy here.