As a beginner it is easy to focus purely on finding that winning '10 bagger' stock that will bring in big profits. However, I believe that time and energy should be first spent on putting together a diversified portfolio that lays the foundation to help protect and build ones wealth.
Priority number one should always be how to minimise losses. There are many ways of achieving this such as applying a 'margin of safety' to an investment and using stop losses. Portfolio management prevents the investors from putting all their eggs in one basket and suffering substantial losses when a trade inevitably goes against them.
I will go on to describe my 'model' portfolio which has taken inspiration from various, albeit scarce, sources on this subject. I cannot claim it is anyway near optimal and is suitable for everyone in all situations. However, it is something I have started with and would be happy to hear other suggestions and ideas.
I have tried to allocate my money into three groups or pots.
1. An emergency unemployment fund of 6 months wages. I've seen up to 1 year recommended but I opted for less based on the redundancy package I should get and the available unemployment support. This money is kept in savings accounts and short term interest rate funds. It is not money to be played with and must be highly liquid.
2. Savings for extra expenditures with a focus on maintaining and protecting wealth. This pot is mostly invested as cash (roughly 50%) as well as government/coporate bond funds (which admitedly I am cautious in using due to hisorically low interst rates but I do not wish to predict or time the market) and precious metals (about 5% as 'chaos insurance', in case the world economy goes belly up!).
As this pot grows I also plan to add a few high quality dividened paying stocks as well as using put/call selling strategies for generating income.
3. Trading and investing to grow and build wealth. This money is invested for the long term and in general should not be withdrawn (includes additonal pension savings, IPS). I have included my passively invested fund portfolio in this catagory, which is split across a diverse set of stock (>70%) and bond (<30%) funds. A critical key to success with such a fund portfolio is 'emotional control' and not bailing out when there is a large draw down in a bear market i.e. selling low. Having a larger strategy in play softens the financial impact during a bear market as well as the resulting need to sell.
I also have an 'actively managed' share portfolio which is included in this pot (more about the value investing principals I use in the future). Money management also determines the position sizes and maximum losses of each trade.
This portfolio takes time to build up and requires commitment to continously save money into the three pots. Unfortunately, one big winning trade will not suddenly make me rich but neither, hopefully, will I blow up and loose everything.
Over the years pots 2 and 3 should keep on growing steadily as I save more income and manage to grow what I have with successful investing.
The biggest risk I believe to an individual investor is to loose their job at the same time as seeing their porfolio crash in a recession. Having a stockpile of cash gives security whilst looking for a job, prevents the need to sell everthing whilst potentially giving the investor the opportunity to newly invest at firealse prices.
How have you organised your portfolio?
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