How to Create Your Own Stock Portfolio, the Easy Way
Today’s Daily Reckoning Australia isn’t for you.
I’m writing with a young person in mind.
Think a mid-20s kid, fresh out of uni, probably attached to a HECS debt.
They may be looking for work in their chosen field.
Perhaps they’ve working in a completely different area than their degree.
Maybe they have about five grand parked in a savings account.
Or maybe they’re trying to pay off that credit card they used to fund their gap year.
The point is, not all of us learn financial literacy at home.
Sometimes we don’t learn those skills until later in life.
One thing I’ve learnt over the years, is that people often say they wish they learnt about ‘wealth creation’ tools many years earlier.
So today, I’m asking a favour of you.
Forward today’s article to the younger people in your life.
Because for many people, where to start when it comes to investing is the hardest part.
Pushed out of cash and into shares
Today’s article came about after I read an article in the Sydney Morning Herald over the weekend.
Because of the double-digit house price falls seen in Melbourne and Sydney over the past year, once again the media is refocusing on those worried about missing out on buying a house.
The article from the SMH noted that young people are not sure how they’re going to afford to save a deposit for house in this low interest rate world. The article stated:
‘So, does it make more sense for couples like Ms Garrett and her boyfriend Daniel Barnfield to invest their money in shares, rather than putting it in a low-interest savings account, so that down the track they are better placed to buy property?
‘It all depends on your circumstances.
‘Chris Brycki, chief executive of Stockspot and a former portfolio manager at UBS, says timelines are important.
‘“If you’re looking at buying a home in one or two years then you’re probably best leaving your money in a savings account,” he says.
‘However, if your timeframe for investing is longer, say over three years or more, then 90 per cent of the time you are likely to do better by investing.’1
This is the second article I’ve read in as many months suggesting people saving a deposit should put money in shares instead of a bank account.
Which is a 180 flip on what would-be house buyers were told five years ago. The ramifications of that we’ll discuss another day.
The most important point of this however, is that people are being encouraged into the stock market.
Which means there’s a whole bunch of people being encouraged into stocks when they don’t know where to start…
Ignore the jargon — you can do this
There’s so much nonsense in the financial industry.
I should know; I’ve worked in it for near on two decades now.
Most websites with free financial information are filled with jargon. Stuff that you can’t understand without googling every second word.
In fact, a large portion of the financial industry in Australia is about drawing you in…and then convincing you that you can’t manage your investments alone.
That’s utter nonsense.
You are the best person to decide how to spend your money.
The problem most people have, though, is how to go about setting up your own stock portfolio.
Most people don’t know where to start. And if you went to see a financial planner, they’d hand you a slightly tweaked version of the same stock allocation they give everyone else.
A stock selection heavily skewed towards the big banks, a telco perhaps, a couple of mining giants, and then maybe Australia’s second biggest technology stock.
Then, they’d send you on your merry way, telling you that you have a balanced portfolio.
I have a different idea to that.
And with a few simple steps, I’ll show you how to set up your own investing portfolio…without spending a cent…
Steps to create your own portfolio
So, how do you get started?
Believe it or not, it’s much simpler to create your own portfolio then you realise.
The first thing to note is that a stock-heavy portfolio isn’t a balanced one, regardless of how well spread out the stock investments are.
While investing in shares is a useful tool to grow your investments, it isn’t the be-all and end-all of investment ideas.
Instead, I suggest you consider spreading your cash out like this…
- 50% of your cash into stocks
- 10–20% into gold and silver bullion
- 10–20% into cash
- 10% in bonds
- 10% ‘fun money’
For today, we’ll look at getting started with shares. And then I’ll wrap up the rest on Wednesday.
Keep it simple
Often, picking stocks is the most daunting part for investors. Investing in cash or gold seems like the easier option.
It’s not. It’s just about getting over the hurdle of understanding the financial jargon.
However, if you want to stick at managing your own investments, you should rely on the knowledge you already have.
Let me show you what I mean.
When it comes to buying and selling shares, most analysts will suggest you trawl through company financials and market updates.
That’s a great method for people who already understand the stock market.
But not everyone enjoys reading those sorts of things. And sometimes, going through pages and pages of numbers actually puts people off.
Investing on your own should be enjoyable, not a chore.
The key to managing your own investments is to pick a business you understand.
I have one rule when it comes to selecting stocks: If the company can’t explain what it does in 10 words or less, ditch it.
This approach has rarely failed me.
Complicated businesses spend more time talking to the market than doing the things they claim to do.
Not only that, with their interests scattered in multiple directions, they can’t focus on what the core of their business is.
For example, conglomerates like Wesfarmers Ltd [ASX:WES] and Woolworths Ltd [ASX:WOW] have multiple businesses, yet both can explain their business in simple terms.
The power of what you know
Step one: Rule out any complicated businesses.
The follow-up to that is to pick stocks you know.
I once had a woman write to me, explaining that she bought shares in Ansell Ltd [ASX:ANN] based on her global experience as a nurse.
She had travelled the world. Worked in every type of hospital you can think of. Top US private hospitals through to third-world, makeshift medical sites.
Through all her years of working, she explained to me that every single hospital she worked at had a box of Ansell medical gloves.
Then, she took this knowledge and researched Ansell’s financial background a little more, before taking the plunge.
This example shows how you can take your profession and apply that knowledge to certain stocks.
I have heard stories of fly-in, fly-out mine workers buying shares in mine recruitment companies…or investing in businesses that provide remote power generators and other plant and equipment, for example.
My oldest friend has spent two decades working for various airlines all over the world.
She’s been in the air, a crucial part of ground management, and has run the operation side of the business at one of the world’s biggest airports. Airlines are businesses she understands.
This type of on-the-ground knowledge can be very powerful when it comes to investing in related aeronautical stocks.
The point is to take advantage of your own knowledge.
You might not feel like you understand the stock market…
But chances are you understand your industry. Take that knowledge and apply it to stocks listed on the ASX.
Learning the lingo
Creating your own portfolio is much simpler than you think.
Now you have your starting point.
Next up is a bit of due diligence.
You actually don’t need to get too bogged down in the financial details of the companies you’re considering investing in.
Look to see if a company is profitable against how much debt it has.
Is the company’s net income slowly increasing? If so, chances are the company is still growing. This means the share price should go higher as the profits grow.
Both Google Finance and Yahoo! Finance provide free basic financial data. And chances are your stock broking platform will have this information too.
Over time, the more research you do, the less intimating the jargon will be.
Tune in Wednesday, when I’ll round out my ‘getting started’ guide to creating your own investment portfolio.
Until next time,