Steps To Building A Profitable Investment Portfolio

Investment Portfolio

Share or investment portfolios used to be a luxury that could be afforded by a few individuals. This has drastically changed over the last 5 years owing to an increase in the number of South Africans who can manage their investments through newly established online share trading platforms.

The aspect of investing through the stock market has been present for ages but has been mainly ignored by the general public because of the red tape involved with setting up a stock portfolio. Dealing with brokers, high entry costs and lack of information were key factors in keeping the trading circle minor.

All these aspects were determined by banking institutions that realized that opening up this avenue would greatly add to their profits and inspire a more loyal informed customer base.

Portfolio Management: Risk & Reward
The best advice that we can give to potential investors is that they should seek the advice of a registered financial adviser with the thrust of covering their our own backs but also a clear warning that you need to put in work or consult with someone that has more experience.

The risks implicated with investing in the stock market can be enormously high if incorrectly managed. People simply buy and sell shares on impulse with no clear strategy or purpose. This article will look at the framework that anyone can employ or adjust to get their portfolio started. A long-term portfolio that stretches through decades and ultimately becomes an abundant nest egg or large inheritance for family & friends.

Why choose a long term Portfolio?
The answer is two simple words – Capital Appreciation.

Stock market returns for a patient investor tend to be more stable compared to short-term traders that dabble in forex or futures.  That stability combined with the compounding effect creates the best environment for capital growth over large time frames.

Investing in equity has outperformed all other asset classes (cash, bonds and property) over many years. Online share trading brokers like Standard Bank and Absa offer a large variety of instruments to trade like ordinary shares, exchange traded funds (ETF), exchange-traded notes (ETN), futures, Forex and others. This all makes balancing a portfolio pretty easy.

Portfolio Split: Risk Management
Our framework merges exchange-traded funds with blue chip/large market cap stocks invested over decades.

Exchange Traded Funds (ETF’s)
Essentially a listed Unit Trust, ETF’s are made up of an assortment of shares or specific indices like the JSE Top 40 (Satrix 40). Unlike Unit Trusts, these can be traded daily on the open market hence providing much more liquidity at lower brokerage fees.

Exchange Traded Funds are fully regulated by the Financial Services Board and can be traded like any other share through your online broker or even by debit order through etfSA.

ETF’s are mainly included to lower the risk of your portfolio as most of them track the main market indices. These market returns are not to be sneezed at as they typically beat inflation and there are always those tax free company dividends that can be converted into more equity or withdrawn.

They also solve the asset allocation problem as you can find ETF’s specializing in different asset classes or sectors:

  • Sector Indices (Satrix FINI, Satrix Indi etc)
  • Top 40 Indices (Satrix 40, Satrix RAFI etc)
  • Property (Proptrax)
  • International Markets (DBX USA, DBX Euro etc)
  • Bonds (RMB Inflation-X)

There are well over 50 different eft’s out there and that list is surely set to grow.

Blue Chip Companies
The other half of our portfolio framework is in the form of blue chip or large cap stocks. Here we talking about the giants of the JSE, such as: Sasol (SOL), Shoprite (SHP), MTN, Old Mutual (OML) and Bhp Billiton.

We are looking at market leaders who are in their specific industries that are ideally part of the top 40. These are companies that you foresee being around in the next 50 years that have a strong track record in South Africa.

Deciding when to buy shares
This is probably the hardest part of our framework. If buying and selling shares at the right price is easy then everyone would be a millionaire. Investing and trading are zero sum games, there is always a winner and loser.

Diversification and the longer time frames help lower the portfolio risk tremendously but timing the market to enter cheaply is the gold standard. Studies in Fundamental & Technical Analysis are strongly encouraged to help with finding trading signals; most brokers offer these free of charge to their customers.

Deciding when to sell stock
In a perfect world…we would never have to sell anything-short notice. Markets go up and down but if the underlying real value of the company remains unchanged then why sell.

This is a long-term portfolio… Analysts and pundits provide their opinions but if Company A is still a great company even though their share price is down then hold.

Investors sometimes don’t realise that owning any amount of shares in company, makes them part owner…albeit a small part. Why would anyone pull out his or her investment in Sasol (a great company yes!) after a few bad days in the market?



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