Finding the right stock to buy is only half the battle. In fact, I would argue, that is less than half the battle.
For example, if you have spotted the company Tencent Holdings Ltd (700:HK) back in 2005 when it is trading around HK$4.70 per share and you invested in it. Today, the share is trading at about HK$108.00 per share, up 2300% or a 23-bagger without including any dividend. Yet if you have only invested 0.1% of your portfolio, it would have been insignificant to your overall portfolio. So you see, knowing which stock to buy is important, but knowing how much to buy is just as important. Here are a few ways to build a portfolio.
The Balance Builder
The idea is to start with a portfolio that you are able to monitor and generally diversified. Diversified would mean that your portfolio is as least well balance across industries and maybe geographical location of operations. For most investors, we tend to start out being a part-time investor, this means that we would have constraint on the time we can spend on managing our portfolio. Therefore, most might be comfortable of building a portfolio of around 15 to 30 companies in different industries. A balance builder will spread his investment in each company evenly throughout his portfolio.
For example, if he has 30 companies in his portfolio, he would investment roughly 3% in each company. A balance builder might even go further by rebalancing his portfolio at certain interval (i.e 6 months). This means that he might buy or sell his long term holding to rebalance so that each company would only stand at about 3% of his portfolio.
The “Let-It-Run” Model
Some investors prefer to let their winners run. Going back to our previous example, if a person has bought Tencent Holdings Ltd amounting to 3% of his portfolio in 2005, he might not sell any of his holding now even if Tencent Holdings might be 30% of his portfolio now. The idea behind this strategy is that we should let our winner run because they have proven to be a market beating performer while letting our losers sank to insignificance rather than adding more money to them.
The “Bet-By-Conviction” Model
Some investors will also size up our confidence level after reviewing a possible investment. The idea here is to buy more of what you are sure of and buy less of what you are unsure about. In this way, you will not be caught with huge losses on some investment thesis which you have doubt about.
Value In Action
Bear in mind that there is no “right” way in building a portfolio, only difference in preferences. The idea is to find a method that you are comfortable in and will be able to execute with confidence.Join us on Facebook for more exciting updates and discussion about value investing. Submit your email address for important market updates and FREE case studies!We will only provide you with information relevant to value investing. You can unsubscribe at any time. Your contact details will be safeguarded. The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Stanley Lim’s personal capacity and does not in any way represent those of his employer and other related entities. Stanley Lim does not own any companies mentioned above.