How to start building your own share portfolio
1. One of the first choices to make is which share dealing service to use. Charges and customer service are the key things to look for. Consider holding collective funds such as unit trusts, OEICS or investment trusts. If you are a novice investor these may be a better way of starting out as they provide you with a diverse portfolio that requires less ‘hands on’ management.
2. Decide on your initial investment strategy. Some investors make the mistake of ‘dabbling’; building up holdings on an ad hoc basis and ending up with an incoherent portfolio. First consider whether you are looking for income, growth or a balance of both, which sectors or markets to prioritise for your research, how much you can afford to lose and the risk you are happy with.
3. Pay attention to valuations but don’t get hung up on them. Ratios such as price-to-earnings can help but shares are usually expensive or cheap for a reason. Also be wary of a very high dividend yield. In the current environment a yield of more than 5% can be a red flag that the market thinks the dividend might be cut or that the sustainability of the business is questionable.
4. Get your level of diversification right. Don’t put all your eggs in one basket. This is very important and ideally any portfolio should have at least 15 to 20 shares spread across various sectors. Otherwise you could be overly-reliant on a small number of similar holdings. However, it is also important not to have so many holdings that you find it difficult to keep on top of your research.
5. Set aside time to monitor your portfolio and keep up-to-date with the news flow from the companies you hold so you can be sure you are making informed decisions. If you don’t have sufficient time to monitor your portfolio it may be worth considering collective funds as these can provide you with the diversification required without the need for close monitoring.
6. While shares should be considered as a long term investment, set a sensible timeframe to review your portfolio. This will depend on the type of investor you are but I would suggest every six months as a minimum. Whether a holding has gone up or down should not cloud your judgement. Consider whether you would still buy it at today’s price. If not, decide whether it is time to sell it and replace it with something you believe in right now.
7. Keep a note of why you bought each holding. This will help you analyse whether it has met your expectations when you review it.
8. Always ask yourself what might go wrong for the company and cause the share price to fall. It is all too easy to focus on the potential and ignore the risks. All companies face challenges and focusing on these can help you avoid getting carried away with an exciting story.
9. Be wary of tips, especially for smaller companies. Sometimes a share price goes up in the short term just because a tip has been published. Don’t be the investor that pays a higher price because of this.
10. Set price targets but review them if something changes. Don’t be greedy if a share price meets or exceeds your expectations. Re-evaluate and consider selling unless there is a genuine reason to expect there is more to come. Similarly, decide on “stop losses” – a price you will sell if things don’t meet your expectations. This will give you a known downside on each share, but don’t set your stop losses too close to the purchase price as they could be triggered by temporary volatility.
Rob Morgan is a pensions and investments analyst at Charles Stanley Direct