Building a Portfolio

Saturday, June 10, 2006

Building a Portfolio

Building a Portfolio

Building a portfolio is really about risk management through diversification. Unless you are hugely confident about a certain stock, putting one hundred percent of your portfolio funds into that one stock is a high risk play. It can also be a high profit play if you are absolutely certain, but a single stock potfolio should be used very rarely and with the utmost discretion.

The amount of diversification you use is a very personal decision, and I can only tell you how my experiences have been in the markets. I usually have from six to ten positions in my portfolio. And I try to keep them in a certain relationship to each other based on what each one does for m y portfolio.

Usually about 25% of my portfolio funds will be in long fundamental value bargain hunting positions. I consider these stocks that are highly unlikely to go down. They are the safest part of my portfolio, and are usually held until the rest of the market finally sees what I saw when I picked them, usually months, and one time over a year.

The next 25% of my portfolio will be in stocks that I think offer superior intermeditate term profit potential for my portfolio, but which still may have some downside risk.

For me personally, the remainder is discretionary or "day trading funds" These funds go into the market whereever I think I have identified a short term opportunity. As you have probably seen if you have been reading my blog, sometimes I am wrong, and forced to hold these stock picks in my portfolio for days or weeks, but ideally, when the market conditions are right, I will be in and out for modest gains on a daily basis. This portfolio setup works for me, but you should experiment and see how to plan your portfolio for your market skills, and your personality.

Portfolio planning experts would probably tell you to go long on everything, and hold 50% of your portfolio in dividend yielding companies. I have tried this from time to time, but it really isn't my style. It's a learning process, and you will have to find your own portfolio comfort zone. If I had a quarter million to play with I might follow their advice, but for my few thousand, this works just fine, and not to brag, but I have never gone broke in my portfolio even starting from a modest 1800 I had from cashing the savings bonds they made me buy in boot camp.

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