17 November 2011

Guideline on Constructing a Stock Portfolio

Today I would like to share with you on some of the guidelines to construct a stock portfolio.

First of all, you have to understand the underlying risk and potential return on stock investment. It is unlike Unit Trust, where you could diversify away the unsystematic risk that happen on single stock. Nonetheless, you may able to find a good stock and put it under your own stock portfolio for long term investment purpose.

In my own opinion, you must have at least 3 years investment time horizon (means that you MUST invest with the money that NOT to be used within 3 years). This is a crucial part especially for those investors that lack of investment experience, and protect you from doing some silly thing by selling a very cheap stock just because of the emergency use purpose.

If you do not have a lot of investment experience, you may diversify or construct a stock portfolio with below objectives:

1. Earn the Dividend during the bear market
2. Enjoy the capital growth during the bear - bull market circle
3. Sell the stock during the bull market or switch it to high dividend yield stock during bull - bear market. 

Below are the classification of the stocks
  1. Defensive stocks - Normally we refer to consumer stocks such as F&N, APB, ShengSiong etc. The stock movement is slightly different from the overall market (means that the beta is normally lower than the overall market). We also can easily determine the future revenue movement as the growth factor normally is quite low as compared to other sector.
  2. Growing stocks - Normally this category suitable to those investors who like to enjoy capital growth instead of dividend. They would risk themselves by investing the stock in early growth stage and wait for it to grow to a certain level before they slowing down the growing speed. It require patience and insight from investors to determine which co. is really can be a 'superstar' stock in future.
  3. ETF - ETF is more on the Top Down Approach (Macroeconomic). If you are good in macro-economy, it could serve as a compliment in your stock portfolio.
On top of the above mentioned items, I would like to share with you on the asset allocation. Normally during the bear market, it is unwise if we hold too much cash on hand. Same goes to bull market, it is also unwise if we hold too much stocks on hand too. As currently the market is more towards bear market, hence in my opinion, we can start investing a little bit cash on the market. Do not risk yourself into invest whole your money into just a single stock, while you do not have a thorough homework into this company. Try to treat your stock portfolio as part of your business. The more homework you put into it, the better result you will get in your stock portfolio.

Good luck in your investment.

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