This Article was first published on 30th Sept 2018 on our Asia-In-Focus Newsletter. To get the latest newsletters, click here.
HOW TO BUILD A SUSTAINABLE PORTFOLIO
I hate to break it to you but we have all been brainwashed when it comes to investing. Although most finance professionals try to drill in the idea to us that investing is hard and should be left only to the “professionals”, that is far away from the truth.
In fact, investing can be simple. And that is the way how we should keep it. In order to have a sustainable and successful portfolio, we have to keep it as simple as possible. We do not need to worry about changing the interest rate, the foreign exchange rate or tracking the GDP every quarter.
When we first started investing, we hardly think in term of having a portfolio. Instead, typically, we would be motivated by the hope of making a quick gain in one particular stock that we are introduced to.
However, that is not the right way of thinking about our investment. Ironically, the stocks that we invest in are not as important as creating the right system for our portfolio.
That might sound counter-intuitive but we have observed that over and over again. The greatest investors around all invest in different stocks in their portfolio. However, each of them has a strong process and system of investing which they are able to repeat over and over again.
Here are 5 easy steps for us to get started in creating the right portfolio for ourselves.
- Understanding Your Time Frame
Investment is a wonderful way to grow and store your wealth. It should not be seen as a method of making a quick buck. The first step toward creating the right system is to know how much time you have. What is your objective in investing and creating the portfolio?
Is it to ensure you have enough for retirement (another 20 years)? Is it to save up for your kids’ education (in 10 years)? Or are you creating a perpetual trust fund for your family (forever)?
If you are serious about building up a wealth base for yourself and your family, I strongly encourage you to give this question some thought. By knowing what you need the wealth for, you would have a better understanding and motivation for creating the right portfolio.
It is important to know that the stock market is a great place to store your wealth in the long term but just a gambling den in the stock term. If we observed some of the richest people in the world, we can see that most of their wealth is stored in stocks, for the long-term (most rarely sell). If the richest people are getting rich by storing their wealth in stocks, shouldn’t we emulate them if we want to create more wealth for ourselves?
- Understanding Your Risk Exposure
After knowing how long you can stay invested in the stock market, it will give you more confidence to stay invested for the longer term.
Next, you have to think about your current risk exposure before investing. This is the risk that you have in your life due to your job, your place of residence or even your other investments.
For example, if both you and your spouse are working in Singapore Telecommunications, getting share options on your compensation and staying in Singapore, then your lives are very dependent on the prospect of Singtel. Imagine if the prospect of Singtel decline, you and your spouse are at risk of losing your jobs and all your shares in Singtel might be declining just when you need it most. In this way, you can see that you are too exposed to the fortune of Singtel.
In this case, your own investment should focus more on helping you diversify away from that risk instead of adding to it. Thus, you should consider investing more overseas and away from the telecommunication sector.
- Drawing Up & Building Up Your Circle of Competence
There are tens of thousands of stocks available for us to invest in. And for a diversified portfolio, we might only need up to 30 COMPANIES in our portfolio. So, as a stock investor, we can invest anywhere in the world. But our capital is always the limiting factor. Regardless of whether you have $1,000 or $10 million to invest, you will run out of capital faster than you will run out of companies to invest in.
Starting with companies and industries that you are more familiar could help you in building your portfolio. Go for simple-to-understand businesses like consumer staples companies, Nestle or Procter and Gamble. Good industries to get started are
- Consumer Staples – Nestle, Dutch Lady
- Consumer Discretionary – The Hour Glass, Bonia
- Real Estate Investment Trust – Ascendas REIT, Capitaland Mall Trust
- Utility – Singtel, Tenaga Nasional
- Building The Foundation: Starting Out With ETFs
If you are unsure what are the stocks you should be investing at the very beginning, you can think about using ETFs as an alternative to buying the base of your portfolio. ETF, Exchange Traded Fund, can be seen as unit trusts that are listed as stock in the stock market. That means that we can buy these funds directly from the stock market, similar to buying a stock.
The advantage of such ETFs over traditional unit trusts are:
- Low transaction fee, just paying brokerage (ETF) over sales charges (Unit Trust)
- Liquidity, you can sell it anytime on the stock market
- Lower management fee, typically 0%-1% (ETF) compared to 1%-2% (Unit Trust)
Hong Kong is also home to some good ETFs which can be seen here at AASTOCKS.
- Having A Investment System
PORTFOLIO TRIANGLE Structure
Lastly, we should think about creating a system for our portfolio and how we are planning to invest. This is contrary to how most of us start investing, by investing in individual stocks without considering the portfolio.
Above is an example of how you can consider building your portfolio. Using my own portfolio as an example, the BASE or foundation of my portfolio is made up of strong and stable income stocks. These are companies in the consumer staples, utility or market leader in a particular industry. They tend to have a very long history of growth and paying a dividend.
You can replace these group with a mixture of ETFs as well, giving you a more diversified base for your portfolio. These group generally make up about 50%-70% of your entire portfolio.
Next, you can choose to add stocks within the growth or asset value category. We talked about our three types of stocks before, you can read more here. This might take up 20%-40% of your portfolio.
Lastly, if you are interested, you can add more speculative stocks at the tip of your portfolio. This might only take up to 10% of your portfolio. Speculative stocks might be newly listed companies, companies facing financial troubles or companies turning around its situation.
Once we have the basics down, we can repeat the process over and over again to build up our portfolio. We do not need to create a diversified portfolio right at the start. If we are committed to invest for the long term, we can slowly build up the portfolio by regularly adding new stocks into it.
My own portfolio took about 5 years before it was well diversified and reached a point where I am more satisfied with it. So take time and be patient in building up your ideal portfolio.
Till we meet again.