Beginner Portfolio Tips

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Hello,

I’ve been investing for over a decade, but never really had a “traditional portfolio”.
I usually just held 2-3 stocks at a time.
I’m coming into a sum of money in a few weeks and want to build a portfolio from scratch, with multiple stocks.
I’m using your Foundation Stocks and Dividend Bull List for a reference point.
My question is: how do you determine what percentage of your portfolio goes where?
What is the right balance? I want to avoid ETFs and Mutual Funds.

Any other advice you have on the subject would be welcome.

Thanks

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Asked on December 22, 2020 11:32 am
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Hi there,

For starters, there is no single rule by which to build a traditional portfolio. You'll likely get different opinions depending on who you speak with. There are so many factors to consider in building a portfolio such as risk tolerance, age, goals, etc.

That being said, I can provide my opinion on the matter. You seem to be focused on building a portfolio of individual stocks, so we won't touch on mutual funds, ETFs or bonds. Personally, I only have a single ETF in my portfolio (ZRE) and it stems from a number of years ago when i couldn't be bothered to research REITs. Outside, of that - I am in all equities and am comfortable with that as it suits my individual profile.

In terms of what percentage, I usually try and keep individual positions to 5% (or less) of the portfolio. That being said, I won't cut my winners outright just for the sake of rebalancing. Given this, I am confortable with a position rising to about 10% of portfolio before I'd start to consider trimming my position.

In terms of diversification, research has shown that the benefits of diversification top out at around 26-28 stocks. So anything more than that, you aren't benefiting from diversification - which is trying to limit unsystematic risk (risk associated with single stock/industry). Now, it doesn't mean you need to go that high either. Officially, there are 11 sectors and 24 industries in the markets according to the The Global Industry Classification Standard also known as GICS. In a perfect world, having exposure to each of these 11 sectors is ideal. Do you need all 24 industries? Not necessarily, and I would not go chasing an industry just because I was missing it in my portfolio.

Here is a list of the 11 Sectors:https://www.investopedia.com/terms/s/sector-breakdown.asp
Here is a list of the 24 Industries: https://www.investopedia.com/terms/i/industrygroup.asp

I think that is a good starting point for anyone looking to start building a portfolio. When we list our foundational stocks, we try to include one from every sector and it is a good place to start doing your due dilligence.

Hope that helps (at least as a starting point)

Mat

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Posted by Mathieu Litalien
Answered on December 22, 2020 12:54 pm