Once you have bought your first shares, it is time to think about assembling a long-term share portfolio. How you go about doing this will
Once you have bought your first shares, it is time to think about assembling a long-term share portfolio. How you go about doing this will depend on the type of shares you want to buy and what feels comfortable for you. However, there are certain basic rules to follow when it comes to building a portfolio, the main one being that you should always opt for variety and not put too much of your money into one sector or type of share alone.
Somewhere Between 15 and 30 Different Shares is Ideal
A lot of people have their own personal theories on how many shares is the perfect amount to own in your portfolio, but most studies agree that somewhere between 15 and 30 is about the right amount. Any more than that and it becomes too difficult to keep abreast of all the latest information and of their price, not to mention the fact that if you have too many shares each share will only be about 1 or 3% of your portfolio and will have a smaller impact on your finances if it starts to do really well. On the other hand, if you have too few shares then you will be putting all your eggs in one basket and that is not a good idea as it will leave you open to bigger losses. Another factor in how many shares you want to buy will be the amount you have to spend when you start your portfolio. If you are going to have less than £500 in any share it won’t be that effective so work out how many shares worth £500 to £750 you could afford to buy with your initial investment and buy accordingly. Thus, if you had £7500 to invest, you should buy no more than 10 or 12 shares for your portfolio at that time.
Mix and Match Your Stocks and Sectors
Mixing by Type – As mentioned above, the main thing to bear in mind is never to put all your eggs in one basket. When it comes to shares there are two types of shares and you should have a good mix of these two types. The first type of share is what is known as a cyclical share. Cyclical shares are shares that are particularly linked to the economy and to economic boom and bust. They are shares in companies such as housing companies, builders or banking companies and as such, they will suffer when the UK economy suffers and profit when the economy is doing well. The second type of share is known as a defensive share. Defensive shares are a lot less volatile and less subject to the whims of the economy and would normally be in utilities companies, energy companies or larger consumer brands. Having a portfolio with both kinds of shares is highly advisable in order to prevent all of your shares heading down the same path when the economy moves this way or that.
Mixing by Size – The next thing to think about when planning your mix of shares is the size of the companies you are investing in. It is advisable to include some very large companies, some small companies and some in between. The larger ones would be companies from the FTSE 100, the smaller ones would be worth less than £400-500 million and the medium companies anything from £500 million to £2 billion. This is another way to balance against volatility as the smaller companies will by nature always be a bit more volatile. Indeed, the smaller the company, the more volatile it will likely be, so bear that in mind when planning a portfolio.
Mixing by Sector – Lastly, it also makes sense to mix up your shares with companies from different sectors. This is a particular trap for anyone who is particularly enthused or knowledgeable about one sector – say, tech stocks – and who therefore puts a lot of money in that one area. However, any sector, no matter how secure it looks, can suffer unexpected shocks so it is always worth diversifying across other sectors such as banking, energy or mining.
As it is so easy to buy shares in any company across any exchange these days, there is no reason to only buy shares in the UK market. By all means buy mostly from the FTSE 100 and invest in companies that you know, but it doesn’t hurt to also invest in some of the big global brands that we all know about (large tech or internet companies for example) which are not listed in the UK. Having a small percentage of your shares based outside of the UK is no bad thing and again, helps to balance your portfolio.
Remember the Long-Term Plan
Once you have got your portfolio up and running the main thing to think about at all times is that this portfolio is for the long term. When the shares go up, think to yourself about the long term. And when the shares go down, think about the long term. You will, at times, need nerves of steel because your shares will inevitably go down son occasion but the key to being a good long-term investor is to ride out the ups and the downs with equal calm. Don’t feel you need every share in your portfolio to be profiting every month of the year. People who tend to swap shares all the time don’t tend to make the best investors and often perform worse in the long term, but that is not to say you shouldn’t be willing to get rid of any deadwood from time to time. Even if the majority of your shares do well over the long term, there will always be one or two that drag their heels or head south and if they continue to do this then don’t be afraid to sell them and reinvest the money in something new. This should only be if you have doubts about the companies, however. If you still believe they are a good bet and that they are doing ok operationally and have a good long-term outlook, then it is probably worth sticking with them.
Lastly, you should think about growing your portfolio as time goes on. We mentioned above that if you only had a small amount of money you should not have more than ten or twelve shares. But as you add more money over the years you will want to either expand on the shares you have and buy more of the same or spread your wings a little wider and buy one or two more shares to balance the portfolio. Each time this happens you should use it as an opportunity to re-evaluate the whole thing and see how you feel about the shares and whether they are still heading in the right direction.