12 December 2011

Why We need to Construct a Stock Portfolio?

Yesterday I happened to saw that Kim Eng Investor Club was having a 1 day course with regards to constructing a stock portfolio. It is a $50 dollar course that I think it can benefit you on constructing a stock portfolio.

Back to the title, first of all we must understand why do we need to construct a stock portfolio before we gotta know how to construct a stock portfolio. According to a modern portfolio theory, that diversification tends to reduce the individual risk. For me, I would like to diversify the portfolio by 3-5 stocks in a portfolio. Let me explain to the reasons why we need to have a stock portfolio to you first:

Reason 1

I am using Cash & Stocks in my Total Portfolio. As the cash can minimum earn about 4% - 5%, hence I would only invest into the stock market if the stocks that I invest can let me to earn more than 5% per year.

Reason 2

I have limited time and energy to monitor all the stocks in the stock exchange. Although I do access to the information in the stock market, but it tends to make over fed by the information in the market.

Reason 3

I would take a longer time to find out which stock that fulfill my stock selecting criteria, such as PE Ratio, ROE, Dividend Yield, Current Ratio, Debt-To-Equity Ratio, Growing Propect etc. It is unwise if we just want to diversify the stocks to those that not fulfilling the searching criteria.

Reason 4

You may experience a higher volatility of the portfolio value in short run. But if you can take time to do your own homework, and find out the stocks that worth to be invested and set your buy price and sell price target, I believe that you can still able to beat the market. This is based on the theory -

Reason 5

Over a longer term of investing, I found that performing a portfolio re-balancing on timely basis for portfolio that I hold, I could actually achieve a better result compared to just buy and hold strategy. This happened because the particular stocks may react more or less on the market news, and we could actually make use of the information and access whether we add or reduce our position in Equities. If you already construct a stock portfolio, you may actually Buy 'Undervalued' stock and Sell 'Overvalued' stock. It is hard to define whether the stock is 'Undervalued' or 'Overvalued' as we tend to not to buy the shares when the market is dropping and tend not to sell the shares when the market is rising.

Okay, now you may say - "I understand the reasons behind now and want to learn how to construct a portfolio, please tell me more". I shall share with you on next few articles here. So, please stay tuned.

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