If you’re a beginner, building a portfolio which may stand the test of time could be confusing, new and a daunting challenge. People often ponder upon what could be the secret to building such a long-term portfolio which may grow and build wealth over a period of 20 to 25 years.
It is a well-known fact that the sooner you begin the better it is.
To understand it in a much better and simpler way, let’s look at it how Warren Buffet would look at it. He observed that the Stock Market is designed and functions in a way that it transfers money from the impatient to the patient investors.
Here listed are a few secrets/rules/tips to build an investment portfolio that grows continuously over a period of two decades or more.
1. Avoid Speculation while Investing
The approach which you pick up from the starting establishes the returns you would receive. If you Invest you will get returns like an investor, but if you speculate, you will get results like a speculator. But isn’t investment speculative, you may ask?
Investment is a process built upon analysis, promises safety and also optimum returns
Any process which does not cover these is speculation. For e.g. Investing in a company with a good financial track record and is at a decent trading price is a well-analyzed investment decision. On the other hand, a stock that has dicey financials but is being overhyped and is being recommended by Unregistered investment advisors can be counted as a speculative trade.
Investing not speculating is the key ingredient to a long-term portfolio
2. Get to know yourself
If you are able to devote adequate time in the market, knowing what’s happening, and monitoring your portfolio, you should keep a large part of your portfolio towards equities (Stocks) instead of Fixed Investment Assets such as Fixed Deposits and bonds
You should also have a slightly higher percentage of Midcap and small caps stocks than blue chip stocks.
If you’re doing it part-time, you should keep more Bonds and fixed income assets in your portfolio and more Bluechip and safe stocks than Mid and Small-cap stocks.
3. Mentally prepared for large Price fluctuations
Markets are prone to price fluctuations given people’s tendency to speculate.
You should be mentally prepared to see your portfolio slide down 30% to 40% in any financial year.
4. Knowing Pricing and Timing.
In the stock market, if you do want to profit from Price Fluctuations, there are two major things, which are timing and price. The timing here refers to buying or selling by following the trend. When the price is in an uptrend, the investor buys, and when it is in a downtrend the investor sells.
Pricing is more about the Intrinsic Value. Each stock has an intrinsic value that is based on its earning capacity. Pricing is the more reliable and logical way for a long-term investing
5. Never forget the Margin of Safety for Valuations
The concept of margin of safety is critical and central to long-term investing.
If you find a stock currently valued at Rs100 which is in anticipation of its future profits. You should try buying it at Rs60 or lower. This protects your downside in case there is a significant correction in the stock price in the future.
6. Diversify your Portfolio
In stock markets, it is nearly impossible to have a 100% success ratio. Even Peter Lynch agrees that if we are right 6 out 10 times, we should consider ourselves lucky. Diversification helps you to balance your wins and losses by not letting your entire portfolio being affected by a single sectorial event. However, too much diversification is also not good. Ideally, you should have a minimum of 15 and a maximum of 30 stocks in your portfolio.
7. High Growth Companies may not always be well.
Investors have a tendency to invest in fast-growing companies or sectors with high growth potential. High-growth companies hardly are available at favorable valuations. The price is usually bid up to high to attract the customer. But it gets difficult to predict for how long the growth will continue. Unless you are absolutely certain about the growth potential and the valuations seem valid, you should stay away from these stocks more or less.
8. Don’t ignore past performance
Long-term investing relies on anticipating how the company might perform in the future. However, in anticipation of future performance, we should not ignore past performances. Companies with good historical performance have a better chance of doing well in the future, compared to the one with poor historical performance. It is always preferred to focus on stocks which gave consistent profits historically than the ones that has been making losses quite frequently.
9. Don’t Overpay
Investors always chase quality stocks with quality returns, and they are willing to pay. However any stock irrespective of its quality is attractive at a certain valuation.
If you pay too high you increase your risk exposure unknowingly.
Always remember, Price is what you pay, and Value is what you get.
10. Focus more on handling downside.
Warren Buffet famously gave two major rules for investing
- Do not lose money,
- 2. Always remember rule 1
This is how an ideal approach to investing should be. You should always consider the downside first, the upside will automatically be taken care of
These are the 10 secrets or golden rules of building a time-resilient portfolio. A little bit of caution, a little of patience and you can build a portfolio which keeps your returns in the green
RURASH is one of India’s investment management firms, providing financial solutions to augment the client’s wealth and build a legacy.