Tutorial: build a first portfolio
Asset allocation decides most of your outcome. Stock picking decides how interesting it feels.
Have a portfolio with a reason behind every part of it.
How build a first portfolio works, in one picture
The same argument as the text, as a chain. Each step is what makes the next one possible.
A screen subtracts, it does not select
The screener's job is to remove the companies you have no business looking at, so your limited attention lands somewhere useful. The work is the reading that comes after.
- 1
Decide the split before you decide the stocks
How much in shares, how much in bonds, how much in cash. The evidence is fairly consistent that this decision drives most of the variation in returns and almost all of the risk. It is also the decision people skip, because choosing between shares and bonds is boring and choosing between shares is fun.
- 2
Start from a core that you cannot get wrong
A broad, low-cost index fund as the centre of the portfolio guarantees you the market return minus a very small fee, which over twenty years beats the large majority of professionals. It is not a compromise. It is a high bar.
- 3
Add individual companies only where you have a view
Every single stock you hold should be justifiable in one sentence. If you cannot write it, the money belongs in the core. There is no shame in this: it is what the professionals who beat the index are doing, just with fewer positions.
Twelve technology stocks is one bet held twelve times, not a diversified portfolio.
- 4
Write down what would make you sell
Do it now, while you are calm and nothing is falling. This document is the only thing standing between you and the worst decision you will ever make, which will be made on a Tuesday afternoon in a market you did not expect.
Every holding has a written sentence saying why it is there and what would remove it.
Read next
Asset allocation decides most of your outcome. Stock picking decides how interesting it feels.
Every one shows its exact method, and the circumstances in which it is wrong. Free, and no account to look.