Topic: Value Stocks

Here’s how to start a stock portfolio for maximum long-term gains

For new investors learning how to start a stock portfolio, buying high-quality stocks and diversification are key parts of the process

The fundamentals of investing are essentially the same for newcomers as they are for established, successful investors.

Are you interested in learning how to start a stock portfolio? Well, if you build a portfolio as we advise, you improve your chances of making money over long periods, no matter what happens in the market.

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How to start a stock portfolio: Hold at least some U.S. stocks

Our view is that virtually all Canadian investors should have, say, 20% to 30% of their portfolios in U.S. stocks.

The U.S. market gives you access to the world’s top stocks. These stocks come in a range of size and quality that’s largely unavailable in Canada.

We also think that U.S. dollar investments provide you with an ideal opportunity for foreign currency diversification, far better than any other stock market or foreign currency.

Over the past couple of decades, stocks in emerging markets provided a wilder ride than U.S. stocks. At times they performed better than U.S. stocks for lengthy periods. But these stock markets lack the underlying quality of the U.S.

We confine our recommendations to the highest-quality U.S. stocks. Many have moved up over the last couple of years. However, it’s rarely, if ever, a good idea for successful investors to sell a high-quality investment just because its price has gone up.

Of course, you may want to make portfolio adjustments that relate to your personal financial goals, temperament and circumstances, and to your individual holdings. This is always a good idea. But it’s much different than simply selling what went up.

In any event, we believe the high-quality U.S. stocks we recommend will be substantially higher sometime in the next, say, two to five years.

How to start a stock portfolio: Know the right number of stocks to hold

When they’re just starting out, most investors have modest amounts of money to invest. Even so, it’s a good portfolio management strategy to invest at least several thousand dollars at a time, even if this means you can only buy a handful of stocks. Otherwise, your broker’s minimum commission will work out to be too high a percentage of your investment on each purchase.

As part of your initial portfolio management approach, you should aim to invest in a minimum of four or five stocks —one from each of most, if not all, of the five main economic sectors (Manufacturing & Industry; Resources; Consumer; Finance; and Utilities). But you can buy them one at a time, over a period of months or even years, rather than all at once. After that, you can gradually add new stocks to your portfolio as funds become available, taking care to spread your holdings out as we advise.

When your portfolio gets into the $100,000 to $200,000 range, you should aim for perhaps 15 to 20 stocks. It’s also best to treat your family holdings as one big portfolio, even if you and your spouse keep your money separate. That way, you can be sure you aren’t operating at cross purposes, or investing too much of the family fortune in a single area.

When you get above $200,000 or so, you can gradually increase the number of stocks you hold. When your portfolio reaches the $500,000 to $1 million range, 25 to 30 stocks is a good number to aim for.

Of course, you may fall a few stocks below that range, or go a few above it, particularly when you’re making changes in your holdings. That won’t matter if you follow our three-part Successful Investor investment advice: invest mainly in well-established companies; spread your money out across most if not all of the five main economic sectors, and downplay stocks that are in the broker/media limelight.

Our upper limit for any portfolio is around 40 stocks. Any more than that and any individual stock will have little impact on your personal wealth.

How to start a stock portfolio: Adding lower-risk investments to a conservative portfolio

Lower-risk investments equate to safer investments. For conservative investing, focus on investing in high-quality stocks that offer hidden value.

Well-established companies are the key to profitable and lower-risk investments. Instead of moving between extremes of risk, we continue to think investors will profit most—and with the least risk—by buying shares of well-established companies with strong business prospects and strong positions in healthy industries. That’s not to say that there won’t be surprises that affect every company in a particular industry. But well-established, safety-conscious stocks have the asset size and the financial clout—including sound balance sheets and strong cash flow—to weather market downturns or changing industry conditions.

What has led you to have more confidence building your own portfolio than having a portfolio manager do it?

What is your most pressing concern about starting a stock portfolio?


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