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How to start building a portfolio? Where do I begin?

Kicking off your portfolio can be a daunting thing. So much complexity and what happens if I get it wrong? Well the good news is that it isn’t so hard and if one combines a little common sense with a good dose of plain old “keeping it simple” it can actually be quite a lot of fun and over the long term also a very rewarding experience.

 

For me the key to any portfolio is lots of ETFs, ETFs (Exchange Traded Funds) give you exposure to a basket of shares (most often an index) in one security. In other words, they provide you with exposure to a whole range of shares (giving you diversification) in one easy step. And why do we love ETFs? Simply because most fund managers (in all their wisdom) tend (especially after costs) to underperform the overall market.

 

It’s for this very reason that I would recommend you start with a general market ETF (such as the STAN40 that tracks the performance of the Top40 index) and use this as the cornerstone of your portfolio – in fact I would recommend that you put at least half your starting amount into this. This will form the “core” of your portfolio and will give it stability and give you what the market pundits call “beta” – (without getting too technical, beta equates to giving you the markets performance, be it up or down). In fairness a novice portfolio manager could stop right here and just invest entirely in a single general market ETF, in the case of the STAN40 you would have exposure to the JSE’s 40 largest companies in their correct weighting at a very low annual cost.

 

But for the budding Warren Buffet in you if you want to pick a few shares to add to your portfolio to try and capture some positive “alpha” (being the out performance of your stocks over the index) then I would recommend the following. Do your homework and come up with 3 shares that you really like, at least 2 of them need to be big companies that form part of the Top40 index (so called Blue chips) focus on names that you know, big familiar brands (companies you admire) and that have good track records, then invest a maximum of 10% of your portfolio into each of them. Of the 3 one share can be something a bit zippier (maybe a newly listed company that you think has a great future) – take a chance here, but only invest a maximum of 5% of your portfolio in this higher risk bet that if it comes off will deliver really good returns.

 

The remaining 25% of your portfolio keep in cash and if a market event happens like a correction or maybe even a crash you can use that money to average in buy some of the stocks that have gone on “sale”.

So a few easy pointers to help you get your portfolio up and running. Happy investing!

 

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