There have been many stock market success stories that might have inspired many investors to try their luck. However, before taking the plunge, it is important to acknowledge that stock markets carry high risk.
A winning stock portfolio allows you to reduce your risk and maximise your returns. This article discusses how you can build a winning stock portfolio.
How to build a stock portfolio?
A portfolio is a collection of stocks that you invest in. You can gain from them or you could lose your money. If you follow some basic principles of investing, you could build your winning stock portfolio.
The ratio of good stocks to bad stocks
All stocks do not produce returns. A stock on which you gain is called a good stock and one that causes a loss is called a bad stock. At least 60% of stocks in your portfolio must be good stocks. This ratio tends to save you from huge losses. You can identify a good stock if it follows these three rules –
- A wide moat: Moat refers to a safety margin from external economic instability. The strength of a stock can be judged by the fundamentals of a company. You can check this by looking at the following:
- Market share
- Proactive management
- Robust policy
- Good quality product
- Fundamental stability
- Underpriced: If a stock is available in the market at a price below its intrinsic value, it is undervalued. Most of the stocks in the market are overvalued. This makes it very difficult to identify good stocks to invest that are underpriced.
- Long-term: Keeping a long-term vision can help you gain attractive profits. You could avoid short-term volatility risk. You could gain from dividends and bonus shares from time to time in the long run.
Manage your risk
There are two types of market risks. These are systematic and unsystematic risks.
- Systematic risk: This is an inherent risk. If the market goes down, your stock price will also fall. Neither can you control it, nor can you reduce it by diversification.
- Unsystematic risk: This risk is limited to a company or a sector. You can reduce it by diversifying your portfolio.
Diversify, but do not over-diversify
Experts suggest that you can achieve almost 90% diversification by investing in 10-15 stocks. You can never eliminate risk. So, it’s better to have limited diversification.
Asset allocation and weightage
You should decide the amount that you want to invest in stock. You should consider your income, age, investment objectives, and risk capacity for it. Include stocks that are undervalued and have high growth potential. Periodically include or exclude stocks based on trade and market situations.
Include mutual funds
In a mutual fund, a fund manager does the research and makes investment decisions. Mutual funds create optimum diversification to maximise your profits.
You can build a winning stock portfolio by following these steps:
- Invest in good stocks: Good stocks have a wide moat. You can gain more if they are underpriced. Always invest for the long term.
- Diversify your portfolio to reduce unsystematic risk, but avoid over-diversification.
- Make proper asset allocation between different stocks. Balance your portfolio regularly to keep up with market movements.
- Include mutual funds to reduce your effort.