Stock Portfolio for Beginners - How to Create Your Stock Portfolio

Stock Portfolio for Beginners: How to Create Your Stock Portfolio?

Essential Tips on How to Create Your Stock Portfolio: An intelligent investor should know the importance of building a well-diversified portfolio. Whether you’re investing in stocks, bonds, or any other investment, you should always build your portfolio smartly. Although most investors have a different strategy for creating their stock portfolio, there are a few main points that should be taken care of.

In this post, we’ll discuss what is how to create your stock portfolio and give you a few of the rudimentary tips while building the winning stock portfolio.

What is a Diversified Stock Portfolio?

A diversified portfolio is investing in different stocks from dissimilar industries/sectors in order to increase profits, reduce overall investment risk, and avoid damage to the portfolio by the poor performance of a single stock.

For getting good returns from your investments, it’s important that your stock portfolio is well diversified. Both under diversification and over-diversification is adverse for an investment. A smartly diversified stock portfolio maximizes the profit and minimizes the risk. Hence, the first step of creating an intelligent portfolio is right ‘Diversification’.

What diversification means, in general, is to buy stocks from different sectors (Ex: Banking, Auto, FMCG, Energy, IT, Metals, etc) rather than buying a single or two stocks of lump-sum. It follows the old rule of intelligent investing: ‘Don’t put all your eggs in the same basket.’

diversified portfolio stocks

While many investors argue that it makes more sense to invest a huge sum of money in a sure-shot stock, however, we differ from this argument. There are various reasons we can give you to support our argument.

First, you can never exactly know which stock is the next Microsoft or the big shot. Stocks like Microsoft are only a few among more than 5,000 stocks in the stock market. If by any chance you made a mistake or if by bad circumstances, the company is not able to perform as expected, and then your entire investment will be in vain & you will face a tremendous loss.

Second, for investing in such a company, you need to be 1,000% sure. You need to do a lot of intense research about the company, which might be generally not possible for retail investors. However, if you build a diversified portfolio you can take slight risks if you are confident about your other holding stocks.

For example, if you have 10 good stocks and you’re certain that most of them are fundamentally strong and are performing well in the market, you can take a little risk in the 11th stock. One riskier stock will not affect your entire portfolio. However, in the case of a single stock portfolio, it is either wins or gone.

Therefore, in this article on how to create your stock portfolio, we suggest retail investors to build a well-diversified portfolio. Do not buy one lakh shares of just one company in your portfolio.

ALSO READ: How Many Stocks Should you own for a Diversified Portfolio?

Advantages of a Diversified Stock Portfolio

Here are  a few of the best advantages of building a well-diversified stock portfolio:

1. Diversification helps you in giving liberty to choose a variety of stocks.

You do not need to do extraordinary in all the stocks you choose. If most of the stocks in your portfolio are performing well, then your portfolio will overall be in profit. Like the legendary investor Warren Buffett said ‘You only have to do a very few things right in your life so long as you don’t do too many things wrong.’

2. It will reduce the effect of the underperforming stocks: Sometimes economy or some sectors underperform and because of which the stock may underperform. Say, if the entire bank sector is not performing well, then your banking stock will be also probably at loss. However, it is very less likely that all other sectors (like IT, Auto, Pharma, FMCG etc), will also underperform at the same time. During such times, diversification can help you to remain in profit withholding the stocks of other sectors.

3. You can keep holding your favorite stocks for long: If because of some unpredictable reason, one of your stocks is not performing well, but you are confident that it will perform well in the future, you can still keep the stock on the stake of your other good-performing stocks. You just need to balance the portfolio and be overall it will be in profit. On the other hand, in the case of an undiversified stock portfolio, if your one stock is not performing, you will be in overall loss and which might lead you to sell that potentially strong stock.

Hence, from the above arguments that we just put forward, you must follow the diversified portfolio approach in your stock investment in order to maximize profits and minimize your losses.

How to Create Your Stock Portfolio?

Now, we will give you an example of how to create your stock portfolio using a diversified portfolio strategy so that you can get a clear idea of what we discussed above. Let’s suppose you’ve to build a stock portfolio of approx Rs 1 lakh. You can build a diversified portfolio with allocations something like this:

StockINDUSTRYPrice on 09-11-2017Number of SharesInvestment ValueAllocation
HDFC BANKBANK₹ 913.9213₹ 11,880.9611.78%
ASIAN PAINTSPAINTS₹ 1,195.6017₹ 20,325.2020.16%
HINDUSTAN UNILEVERFMCG₹ 1,252.9012₹ 15,034.8014.91%
RELIANCEREFINERIES₹ 892.0417₹ 15,164.6815.04%
CADILAC HEALTHPHARMA₹ 478.8017₹ 8,139.608.07%
TITANJEWELLERY₹ 777.9010₹ 7,779.007.72%
TATA CONSULTANCY SERVICESIT₹ 1,368.209₹ 12,313.8012.21%
BHARTI AIRTELTELECOMMUNICATION₹ 462.9922₹ 10,185.7810.10%
Total₹ 1,00,823.82100%

diviersified stock portfolio example trade brains

Quick Note: The above example is only for educational purposes and should not be considered as a stock recommendation or suggestion. Please pick stocks carefully before investing.

Closing Thoughts

In this article, we discussed how to create your stock portfolio. Here, we understood the importance of building a well-diversified stock portfolio that can maximize profits and minimize risks.

Although there are many other important points in our discussion about how to create your stock portfolio, however, we’ll discuss them in our subsequent posts. Till then, have a great time and happy investing.

Why building a great stock portfolio is a marathon not a sprint

Why building a great stock portfolio is a marathon not a sprint?

Building a great stock portfolio is the key to build wealth over time. However, the trouble is that the process of creating excellent stock portfolio ‘not-so-fast’ as most people imagine it to be.

Most of the people who enter the stock market are eager to invest everything right away. They want to build a fantastic stock portfolio at once and then relax for years. However, that’s not how building a good portfolio works.

One Simple rule to build astonishing stock portfolio:

If you’re trying to make a great stock portfolio within a month, then you are going to fail. Do not try to build an extraordinary stock portfolio in a month or two.

It takes years to find the best stocks and building an amazing stock portfolio. Moreover, you are not supposed to find all the great stocks at once- one at a time.

The actual strategy to build a great stock portfolio is simple. Invest in good stocks, continuously monitor and then do either of the following…

  • Continue holding the fundamentally strong shares
  • Get rid of the losers.

With time, you will notice that all the right stocks will add up and most of the poor shares will be gone.

Why do most people fail to build a strong stock portfolio?

A majority of investing population fail to build a strong portfolio is they like short-term profits/gains.

If you keep selling your best stocks, then how are you going to build a great portfolio over time. You have to keep your winners and cut your losers. That’s the key to make an amazing collection.

However, most people do the contrary. They sell their winners in short-term to get instant gratification. And they keep adding their losers (just to break-even).

New to stocks? Confused where to begin?  Here’s an amazing online course for beginners: ‘HOW TO PICK WINNING STOCKS?‘ This course is currently available at a discount. 

The market gives opportunities – Repetitively!!

When you are investing in building long-term wealth, you need to understand that market will you opportunity, again and again. Maybe not instantly, but definitely.

Suppose you missed a fantastic company when it was trading at a decent valuation. Now, the basic instinct of most of the inexperienced investors is to make a position in that stock ‘anyhow’ (Winner’s Curse). However, buying an over-valued stock and thinking that you’re building an amazing portfolio is stupid. Here, you need to have patience.

Remember that market will give you opportunities. Maybe not instantly, but definitely in the long run. You just have to keep patience and wait for the perfect time to enter in that stock. Sometimes, this opportunity might take years to appear again.

Let me give you an example from my experience. I was considering to buy VIP industries in June-July 2017. At that time, it was trading at a stock price of Rs 180-190 (decent valuation compared to the price at that time). However, during that period, I was overly occupied with some important work at my day job and missed the opportunity. The cost of VIP Industries continued to climb up in the next few months.

Nevertheless, I got the next opportunity to enter that stock in March 2018 (after nine months of waiting)- when most of the shares were again trading at a low price because of the re-introduction of the long-term capital gain tax. I purchased the stock of VIP Ind at Rs 312 in March 2018. I was planning to invest more if the price goes down further, but it didn’t. Currently (June 2018), the stock is trading at a price of Rs 438.

vip share price

(Disclaimer- I used this stock reference just for example. It’s not a recommendation or advisory. The stock might be trading at a high valuation currently).

Conclusion:

Building a great stock portfolio takes time. It’s not easy to create a great portfolio in a month. 

But remember- the market is going to give you opportunity again and again. Building a great portfolio is not a sprint. It’s a marathon!! Have patience.

Happy Investing.

Portfolio Management Hacks That Every Beginner Should Know

#6 Portfolio Management Hacks That Every Beginner Should Know

Just buying good companies at a discount price won’t make you a good investor. You need to learn the art of portfolio management.

Your stock portfolio won’t consist of just a single stock. You will have multiple stocks in your portfolio. When most of these stocks are performing well, then your portfolio will give you best returns.

In this post, I’m going to give you 6 portfolio management hacks that will help you to manage your stocks efficiently.

 #6 Portfolio Management hacks that Every Beginner Should Know

Here are 6 best hacks that will help you manage a healthy portfolio so that you can get the maximum returns on your investments.

1. Keep some ‘Cash’ in hand:

cash in hand

Cash in hand will give you flexibilities to act on new opportunities. You should not remain fully invested in stocks (with zero liquidity) at a particular interval of time.

Let me give you an example from my personal experience that why some liquidity is important for a successful portfolio management.

During demonetisation in November 2016, the share prices of a lot of good companies were down and they were trading at a discount price. Due to the sudden announcement by the PM Modi, the whole market was bearish and just within a few weeks of demonetisation, a lot of fundamentally strong company’s share price was way below than what they deserved.

However, as this announcement was unexpected, I wasn’t ready for it.

I graduated from my college only a few months before demonetization and had invested most of the money that I get as my salary (after expenses). I didn’t have much cash in hand.

That’s why, after demonetization even though I knew that many stocks were trading at a great discount and could give amazing returns soon in future, I couldn’t buy them. As a firm believer of not investing on the borrowed money, the only option left with me was to wait for my salary.

Moreover, getting money by selling those stocks which were already in my portfolio didn’t make any sense to me. I didn’t want to sell my holdings (in the loss as the whole market was down) as I was optimistic about my stocks for the long run and was confident that those stocks will eventually make me money.

At the end of the month, I got my salary and invested it in stocks. Nevertheless, I missed many cheap stocks that could have made me a huge money just because I didn’t have much cash in hand.

Lesson: Always keep some ‘cash’ in hand. Although the cash in hand or in your savings account will not give you as much return as the invested capital, however, having some liquidity will help you to act in the cases of sudden opportunities.

2. Diversify your portfolio:  

diversified portfolio

You do not want just apples in your portfolio. What if suddenly whole ‘apple’ market starts to decline and no one is ready to buy those apples from your at a higher price than what you paid for. It’s better to also have oranges, grapes, guavas, lemons, watermelons etc in your portfolio.

Also read: How to create your Stock Portfolio?

Here, what I mean is that you need to have a stock portfolio with a mixture of companies from different industries. One from automobile, another from pharmaceutical, third from consumer durables, forth from banking etc. This helps you to reduce the risk if one industry goes wrong and starts underperforming. In such case, the overall effect of just one stock underperforming won’t hurt your entire portfolio.

In general, you should have 8-10 stocks in your portfolio.

Note: You should avoid both ‘under-diversification’ and ‘over-diversification’. Even over-diversification is not good for your portfolio. It kills the profits. When you have 20+ stocks in your portfolio, then even if 2-3 stocks are performing exceptionally well, still the overall effect on your entire portfolio will be quite less.

Also read: How Many Stocks Should you own for a Diversified Portfolio?

3. Monitor continuously and Re-evaluate:

monitor your portfolio

After buying the stocks in your portfolio, you need to keep an eagle-eye on the fundamentals of your holding stocks.

Nothing is permanent and the companies with exceptionally strong fundamentals, are capable of changing their fundamentals in future. Even a blue chip company can degrade and become a mediocre stock with time.

That’s why you need to continuously monitor the stocks in your portfolio and regularly re-evaluate your holdings (at least once every quarter).

Each company announces its quarterly results and other corporate announcements time to time. All you need to do is to keep updated with these pieces of information.

Also read: How to Monitor Your Stock Portfolio?

Further, you also need to continuously evaluate whether the reason for owning the stock is still valid. For example, let’s assume that you bought a stock XYZ when it was the leader in its industry. However, after you bought the stock, the company starts to perform poorly and begin losing its position as the market leader. Some other company starts dominating that industry now. In such case, you need to re-evaluate that whether you still want to keep that company. Can that company regain its position as a leader or will it continue to give poor results in future?

Similarly, you also need to keep track of the financials of the companies and other important ratios. For example, when you bought that stock, suppose the stocks’ PE ratio was low and it was undervalued. However, after a few years of holding, the market price has increased a lot compared to the company’s earnings. That’s why the PE ratio of that company is high now and the stock is over-valued. In such case, you again need to re-evaluate that stock to find whether the stock is still financially strong.

In short, while managing your portfolio, you need to continuously monitor the health of the stocks and re-evaluate if the situation changes.

4. Have Patience

patience

No matter how good the stock is, if you are not patient with it, then it won’t give you great returns.

Value investing works. However, it might not work immediately. Maybe the stocks won’t perform in short-term. However, in the long term, value investing always outperforms the market.

That is why you need to have patience while you are investing in stocks. You should give your stocks a chance to grow and wait for the undervalued stocks to reach its true potential.

Sticking with the stocks in your portfolio is one of the biggest portfolio management hacks that you need to learn. Selling your stocks on short-term corrections or booking small profits won’t be of much use for the value investors.

When you have patience, then time is your friend. You just have to sit back, relax and let the power of compounding do its work.

5. Average down:

average down

One of the biggest lessons that I learnt from my experience as a value investor is that it’s impossible to time the market. You will never be able to find the exact bottom. Buying at ‘exact bottom’ and selling at the ‘exact top’ is a myth.

That’s why it makes more sense to not invest all at once but rather average down. You can purchase more stock when the stock price declines.

Overall, it’s better to average down the purchase and not invest all in ‘lump-sum’ at once (and later regret when the stock price goes down).

Note: I know that you might have read at many places that people lose money in stocks just because they try to average out and reduce their purchasing price. It’s true! If you have bought a ‘poor’ stock and start to averaging out when it starts underperforming, then you’ll definitely lose money by following this strategy. However, if you have picked good stocks, and find that stock at even a bigger discount in future, then why not to seize that opportunity and buy more. Averaging down is a great strategy if you know what you are doing.

Now, different investors follow different strategies to average down their purchase price. One of the popular theory is X/3 investing strategy, where X is the total amount that you are planning to invest. This theory states that you should invest X/3 amount in a stretched period of three times to average down the buying price.

For example, if you are planning to invest Rs 60k in a stock, then buy that stock in three steps of 20k each. By doing this, you can avoid the chances of missing any big opportunity if the price declines in the near future after you invested.

Nevertheless, as already mentioned, different investors use different averaging strategies and feel free to create one for yourself.

Also read: What is the minimum money I need to start stock trading in India?

6. Increase your investment amount continuously:

long term continuous investment

This is the last hack for successful portfolio management. Increase your investment amount continuously with time, no matter what’s the amount.

Even small investments will add up when you are investing for a long interval of time.

For example, if you get a salary raise or a bonus, then after making new (obvious) purchases of whatever you were planning for a long time, spend the remaining amount in your portfolio. Continuously increasing your investment amount will help you a lot in creating a great portfolio in the future.

Further, if possible try to automate your investment. With the facilities of net banking and online brokerages, you can easily transfer a fixed amount of money for investing each month automatically. This can also bring a disciple in your investment strategy.

Note: Even though its suggested to increase your investment amount with time, however, avoid investing money that you need in near future or the money that you borrowed. Invest only what is surplus and what you won’t be needing for the next couple of years.

Also read: The Easiest Asset Allocation Method- 100 Minus Your Age Rule

Summary

Although managing your portfolio might seem a little tough, however, with the help of few simple hacks, you can manage your portfolio efficiently. Here are the top six hacks that are discussed in this post:

  1. Keep some liquidity (Cash in hand)
  2. Diversify your portfolio
  3. Monitor continuously and Re-evaluate
  4. Have Patience
  5. Average down
  6. Increase your investment amount continuously

That’s all. I hope this post is useful to you.

Please comment below if you have any doubt and want to add any other portfolio management hack. Happy Investing. Cheers!

New to stocks? Want to learn how to invest in Indian stock market from scratch? Then, here is an amazing online course: INVESTING IN STOCKS- THE COMPLETE COURSE FOR BEGINNERS. Enroll now and start your share market journey today.

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