DESIGN YOUR PORTFOLIO

 

 

INTRODUCTION

 

I have heard people say they satisfied with a 25-30% annual return from the stock market! Satisfied? At that rate they’d soon own half the country along with Japanese and Bass brothers. Even the tycoons of the twenties couldn’t guarantee themselves 30 percent forever, and Wall Street was rigged in their favour.

What’s wrong with high expectation? If you expect to make 30 percent year after year, you’re more likely to get frustrated at stocks for defying you, and your impatience may cause you to abandon your investments at precisely the wrong moment. Or worse, you may take unnecessary risk in the pursuit of illusory payoffs. It’s only by sticking to a strategy through good years and bad that you’ll maximize your long term gains.


By the way, when you are figuring out how you are doing in stock doesn’t forget to include all the costs of subscription to newsletter, financial magazines, commission, investment seminars, and long distance calls to brokers.

 

 

HOW MANY STOCKS IS TOO MANY

 

How do you design a portfolio to get that 15 to 18 percent return? How many stocks should you own?



There is a long standing debate between two factions of investment advisors, with the Gerald Loeb faction declaring, “Put all your eggs in one basket,” and the Andrew Tobias faction retorting, “Don’t put all your eggs in one basket. It may have hole in it.”

If the one basket I owned was Wal-Mart stock, I’d have been delighted to put all my eggs into it. On the other hand, I wouldn’t have been too happy to risk everything on a basket of Continental Illinois. Even if I was handed five baskets one apiece from Shoney’s, The Limited, Pep Boys, Taco Bell, and Service Corporation International- I’d swear it was a fine idea to divide my eggs between them, but if this diversification included Avon Products or Johns-Manville, then I’d be yearning for a single, solid basket of Dunkin Donuts. The point is not to rely on any fixed number of stocks but rather to investigate how good they are, on a case-by- case basis.

In my view it’s best to own as many stocks as there are situations in which: (a) you have got an edge; and (b) you have uncovered an exciting prospect that passes all the tests of research.

There is no use diversifying into unknown companies just for sake of diversity. A foolish diversity is the hobgoblin of small investor.

 

 

SPREADING IT AROUND

 

Spreading your money among several categories of stocks is another way to minimize downside risk.



Slow growers are low-risk, low gain because they are not expected to do much and the stocks are usually priced accordingly. Stalwarts are low risk, moderate gain. If you own Coca-Cola and everything goes right next year, you could make 50 percent; and if everything goes wrong, you could lose 20 percent. Asset plays are low risk and high return if you are sure of the value of the assets. If you are wrong on an asset play, you probably won’t lose much, and if you are right, you could make double, a triple, or perhaps a five bagger. Cyclicals may be low risk and high gain or high risk and low gain, depending on how adept you are at anticipating cycles. If you are right, you can get your ten-bagger here, and if you are wrong, you can lose 80-90 percent.

Meanwhile, additional ten-bagger are likely to come from fast growers or from turnarounds-both high risk and high gain categories. The higher the potential upside, the greater the potential downside, and if a fast growers falters or the trouble old turnaround has a relapse, the downside can be losing all your money.

 

Again, the key is knowledgeable buying.

 

Younger investors have more years in which they can experiment and make mistakes before they find the great stocks that make investing careers.

 

If you can’t convince yourself “When I am down 25 percent, I am a buyer” and banish forever the fatal thought “When I am down 25 percent, I am a seller,” then you’ll never make a decent profit in stocks.

 

Show me a portfolio with 10 percent stops, and I’ll show you a portfolio that’s destined to lose exactly that amount. When you put in a stop, you are admitting that you are going to sell the stock for less than it’s worth today.

 

 

 

Next blog is coming about-

Best Time to Buy and Sell.

 Thank you again for your Patience.

Keep supporting as always.

 

Congratulation you take one more step towards your financial freedom.

This summary from Book-“ONE UP ON WALL STREET”

 

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