Many consumers are aware of the importance of building an investment portfolio for long-term wealth outcomes, but may be confused as to how to successfully build a share portfolio.
Building a share portfolio from scratch might seem intimidating, but there are steps you can take to make the process more bearable by fitting in with your investment style.
This guide will teach you the basics of building your very own share portfolio, the different styles investors take on, the benefits of having one and the risk associated with shares.
A share portfolio is another name for a person's shareholdings.
Essentially, a share portfolio is a collection of stocks that you invest in and hope the businesses inside the portfolio make a profit.
Investors should be basing their performance primarily on how the portfolio as a whole has grown rather than the individual stocks that make up the portfolio, although it is important to understand what you own and why you originally bought shares in the business.
| Response | |
|---|---|
| Online share trading platform or online broker | 62.72% |
| Micro-investing app | 20.71% |
| Robo-advisor | 8.28% |
| Other type of investment app | 4.73% |
| Full-service stock broker | 3.55% |
When you are looking to start a share portfolio it is important to have a goal in mind prior to beginning in order to take emotions out of trading and purchase stocks based on longer-term objectives.
Your investment strategy should incorporate a mixture of your longer-term goals, your personal risk tolerance and your values as an investor.
There are 3 main ways to build a portfolio:
The most popular method of building a share portfolio is through purchasing individual stocks.
As the name suggests, shares or stocks represent a "share" of a company.
Basically, you own a very small part of a company, with your return being based on the performance of the business.
Should the business execute on its strategy, it is likely over the long term the share price will rise, while poor performance will mean the share price will fall.
However, day-to-day share price movement can depend on many things.
You make money from stocks the same as you would any other product – by selling for a higher price than what you initially paid.
To find out how to buy shares or if you are looking for a broker, click here.
Alternatively, investors who find individual stock picking too complex or prefer to take a market approach can choose to invest in exchange traded funds (ETFs) instead.
ETFs are investment funds made up of multiple shares or other assets that can be bought and sold on a stock exchange.
Think of it like buying a basket of shares that you can purchase at the same time.
ETFs have become popular in the last few years in Australia thanks to the rise of index fund investing and because you can invest in multiple shares in one trade.
Each ETF is allocated an ASX code and can be bought and sold by investors the same way that you would buy and sell shares.
By investing in ETFs, you can easily create a diversified portfolio and spread your investment across a wide range of asset classes.
Much like individual stocks, not all ETFs do the same thing and it is important for investors to know what they are buying.
Some ETFs simply track a market. For example you can buy an ASX 200 listed ETF which will simply allow the investor to track the performance of the ASX 200 (the 200 largest businesses on the Australian market).
Likewise, investors can also buy shares based on themes. Thematic investing again is buying a basket of stocks, but this it's based on a theme. For example an investor who believes in lithium shares but is unsure which individual stocks will win could buy a basket of stocks that are exposed to lithium.
How popular is share trading?
34% people have invested in shares or cryptocurrencies, according to our consumer sentiment tracker. 43% of men said they have invested while only 25% of women have invested in shares or cryptocurrencies. NSW and Victoria are the most popular states for share trading.
Investors who are unsure of what they should buy but want to gain exposure to the share market could try robo-advice.
A robo-advisor is an online platform or app that provides the same services as a traditional financial adviser.
Using a mix of algorithms and analysis from experts working behind the scenes, these digital advisers create financial plans for customers and automatically manage their investments.
The investment portfolio you receive is based on your financial goals, investment timeframe and appetite for risk. Once your money is invested, the robo-advisor manages your portfolio and re-balances it whenever necessary to ensure it remains in line with your risk tolerance levels.
Financial advice is often seen as for "wealthier investors", but passive robo-advisors are around one-tenth of the cost.
The other advantage of using a robo-advisor instead of making decisions yourself is that it removes the emotion from investing that can often lead you to make the wrong decisions.
While we all want to get rich quick, purchasing highly risky/volatile stocks is not for the faint-hearted.
Instead the majority of investors should focus on long-term accumulation of wealth, have a budget in mind to invest and realistic growth targets along the way.
Once you've established why you are investing it is time to begin purchasing stocks in your portfolio.
Choosing individual stocks involves more than getting a hot tip at your neighbour's barbeque and should involve lots of research into the company.
A good starting point is knowing the basics about the company, what it does, how it makes its money and growth potential of the business and the sector it is in.
Going further, investors should take a deep dive into a company's financials which can be seen through the ASX.
These include the company's balance sheet, its projected growth and ratios used to value stocks such as its P/E ratio (price to earnings). As an example, say a company has a P/E of 10, that means you're paying $10 for $1 of the company's earnings today.
Once you understand the basics of a company and have found a select few it is time to choose what you want to become a part-owner in.
To help narrow down the types of shares you might want to buy, you could consider the type of investor you want to be.
When you are starting out your investment portfolio, it might be handy to work out your investment style as it will guide the type of shares you will be interested in and how you should construct a share portfolio.
An investment style is often also referred to as an investment strategy or investment philosophy. In layperson's terms it is simply the approach you take when you start building your portfolio.
Knowing what type of investor you want to become will help decide the types of shares you should be focusing on.
Broadly speaking, investors fall into 4 main categories:
While all 4 styles have their pros and cons, having a basic understanding of what type of investor you want to become can help narrow down which stocks you should purchase.
Investing for diversification is a balancing act. Investors want to be exposed to the winners, while mitigating exposure to the losers.
As such, how many stocks an individual needs to invest in to be classified as "diversified" ranges greatly between experts.
Some tell beginners that if you're going to invest in individual stocks, you should aim to invest in 10 to 15 different stocks as early as possible for diversification.
While others think investors need closer to 30 stocks to be protected from downside risks through diversification.
Whether the individual investor chooses 10 or 30 stocks for diversification, is up to them, but either way they should focus on businesses in different sectors.
The ASX classifies stocks into the following 11 sectors with a diversified investor having exposure in a variety of industries.
And while investors do not need exposure to all 11 sectors it is favourable not to have all your money tied to 1 sector.
Remember, if an investor buys all 4 of Australia's largest banks, even though they bought 4 different shares, they all face the same risks and therefore the investor is not diversified.
Regardless of the style of investor you are, it is important to understand the risks associated with investing and how you can minimise them.
The simplest way to reduce risk for any long-term investor is by diversifying your portfolio.
As the name suggests, a diversified portfolio is an investment portfolio with diversity. This means that the investor has a range of different assets in their portfolio, rather than only investing in a single asset.
While adding more money to the market to lower risk might seem counterintuitive at first, having a variety of stocks means an investor is not exposed to one asset type.
For example, say the price of gold falls from $2,000 an ounce to $1,600 an ounce.
If the investor is well diversified, owning say 20 companies then the gold price fall is less likely to impact their portfolio. However, if the investor only owns gold miners, they will be significantly impacted by the change.
Put simply, a diversified portfolio means the investor hasn't put all their eggs in one basket.
Before investing in the stock market it is important that any investor understands the risks associated with investing.
The biggest risk of investing in the share market is the investor could lose some or all of their investment if the business collapses.
There are also risks that an individual company or the broader markets do not perform as well as the investor expects, with large depreciation in value.
Worse still, if the company invested in goes out of business, the investor is likely to lose everything, with shareholders the last to be paid out when the business is sold off.
Despite hearing stories of getting rich quick, it is also important investors have realistic expectations of how their portfolio could grow over time. Failure to set these expectations could result in taking larger risks, leading to larger losses.
As such it is important not to trick yourself into thinking this could not happen to you and you should understand the risks before starting a portfolio.
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