The collection of stocks you've bought and held at any given time.
Building a Portfolio requires an understand of the risks and how to minimise those risks so you don't (pardon our French) "lose your shirt!"
To Protect Your Portfolio, we suggest that you diversify... aka put your eggs in different baskets!
Think of your Portfolio as a football team
A football team can only have a maximum of 11 players on the field at any given time, this is kind of like your invested cash. You can only have as many stocks as you can afford, so pick wisely how and what you invest in.
To win a football game, you should pick only the best players. But we can’t have 11 Lionel Messi’s on our team, instead we’ll need to pick players based on our team’s needs.
While Messi is an excellent football player, who strikes with the precision of a military canon and dribbles past players with blazing agility…he isn’t that good at goal keeping because… well he isn’t a goalkeeper.
The point is, in order to score a goal, even Lionel Messi needs a good mix of teammates with different yet complementary skills. Stocks work in a similar way.
Are there risks involved?
Of course… just like in football. Players can get hurt; the weather can be bad.
In investing your shares could lose their value.
Company-Specific Risk: The risk associated to a particular investment. For example, a food manufacturing company has a higher risk of enduring a loss during a lockdown than an internet-based service firm.
Systematic Risk: the chance that an event will occur that’ll impact the whole economy, like Covid-19.
These are all unforeseeable but there are ways you can minimize its affect.
While we can have an investment portfolio consisting of high growth tech companies with cool CEOs, if the tech industry experiences a crash, our portfolio will also take a large hit. That is why we need to have alternative stocks to balance out the risk.
We call this DIVERSIFICATION
Just like in football, players are transferred. In investing we can buy stocks in different companies to increase the value of the portfolio while minimizing the risks.
The general rule of thumb is to hold 15 to 20 stocks in different companies of various sectors. At this point, in theory, you’ll experience 90% of the benefits associated with diversification.
But like in everything we do, making informed decisions can prove invaluable. Every company has their strengths and weaknesses, and we can use this information to minimise risk, maximise return, and achieve our end goal to build a portfolio. So, remember to always read up on the company you are investing in and not go into it blindly or on the word of others.
Looking for more?
We have more education content coming right up! Stay tuned for some more.