There are seven fundamentals you need to know when putting a profitable share portfolio together. By following these simple rules you can use the share market to help you finance whatever your dreams may be. Read our guide to find out what they are and how to make sure you’re building a profitable share portfolio with the help licensed financial planners, Pinn Deavin.
Know your goal
Before you construct a share portfolio, you need to know what you are trying to accomplish. Documenting your goal upfront increases your likelihood of achieving it, whether you want to purchase a home, build a retirement nest egg or create a regular income stream.
You also need to ask yourself a few more important questions. Is it a short, medium or long term goal? How much time do you have to achieve it? How much money are you prepared to invest? The answers to questions like these will help you more clearly define your goal, so you can then create a realistic plan for making it happen.
Have a plan
As in any journey you undertake, you need to have a road map so you know where you’re going and the same is true when building a share portfolio. The most successful portfolios are not thrown together randomly, but are constructed based on a solid understanding of the fundamentals of the securities they comprise. Think quality over quantity and plan to build a portfolio that delivers solid, long-term results.
Do your homework
You would never attend an auction without knowing what you are bidding for and nor should you when investing in the share market, which is the biggest auction of them all. There are plenty of free knowledge resources available to help you get an education on share market basics, or you can engage the services of a financial planner for more specific advice.
The amount of research you do into the share market should be in proportion to how active an investor you plan to be and how much risk you intend to expose yourself to.
Select the right stocks
Typical assets and securities you might wish to have in your portfolio can include:
- Stocks – choose with factors such as sector, market cap and stock type in mind.
- Bonds – choose according to factors such as coupon, maturity, bond type and rating and the general interest rate environment.
- Managed funds – these are stocks and bonds professionally researched and chosen by fund managers (for a fee).
- Exchange traded funds (ETFs) – an alternative to mutual funds that are passively managed and therefore cheaper.
If you’re a newcomer to the share market, some pundits recommend that you start your portfolio by selecting from the Top 20 Australian shares, which tend to be less volatile and lower risk, while still providing reasonable returns over time. These large companies tend to follow a similar pattern to the All Ords index. And above all, be sure to keep your portfolio diversified, choosing securities from an array of asset classes, subclasses and industry sectors.
Know your limits
When planning your share portfolio, one of the factors you need to consider is how much risk tolerance you have as an investor. The share market offers investments with various levels of risk vs return, but if you can’t afford to lose your money or can’t sleep at night worrying about losing it, you would be better off staying away from the high risk/high return end of the market.
Maintain your portfolio
Once you have constructed a portfolio, you can’t simply put it in the bottom drawer and forget about it. You will need to reassess its contents periodically as market movements may cause the weighting of individual investments to change over time. Changes to your financial situation, future needs or risk tolerance may also require you to adjust the contents of your portfolio. But be sure to consider the tax implications of selling off particular assets to avoid incurring significant capital gains tax.
The hectic pace of the stock exchange floor is not how you want to run your portfolio. While it needs to be analysed and rebalanced on a regular basis, buying and selling shares in reaction to the daily whims of the market is not a good idea. If you have built a solid platform of shares, knee-jerk reactions to market movements should not be necessary and maintaining a long-term view should deliver consistently positive results over time.
Other things to keep in mind
Along with the fundamentals outlined above, the following are some useful tips to keep in mind when creating and managing your share portfolio:
- If you use the services of a financial planner, remember at the end of the day, you are ultimately responsible for any gains or losses you make, so make sure you have a good knowledge of what you are doing, even when following the advice of others.
- Managing your risk is vital when investing in the share market, so be sure to preserve your capital and profits from market downturns by considering setting up stop-losses (predetermined points at which you sell shares to avoid even greater losses).
- While most investors have no trouble buying shares, the real skill is knowing how (and when) to sell them. Learn this and you will have a valuable weapon in your knowledge base.
The bottom line
If you follow the simple rules outlined here and keep your portfolio well maintained and fully diversified, there is no reason why anyone cannot achieve long-term financial success from investing in the share market.
And if you’d like some assistance with your portfolio management, Pinn Deavin provides peace of mind with personalised advice on a timely basis and total transparency. To find out more, simply fill in our online query form or call us on (02) 8525 3700.