Building a Portfolio of shares
Start building up a portfolio of shares over time. The stock market is one of the biggest generators of wealth around.
We recommend that you buy 7 to 15 Small Cap stocks, but you don’t need to own these straight away! You can build up a Small Cap Share Portfolio over months, or even years. But your goal is a diversified portfolio with 15 shares.
Tier 1 Stocks: Build a Core with Stable Businesses
A good start is to build 5 or 6 large positions in companies that are substantial operating businesses.
Own 5-6 Core stocks
Substantial businesses mean they are able to be valued by fundamental investment criteria, and most will pay dividends.
Each day you should ask yourself: would I buy this stock today?
Each stock is 5-6% of your portfolio
Your positions should be relatively large in the context of the portfolio, ranging from 5%-8% maximum of the total portfolio at current prices.
Buy Quality Companies
We have many examples of both Small Caps and Blue Chips that are stable businesses.
Don't ignore Small Caps in this space. A lot of little companies are excellent quality businesses.
Tier 1 Stocks in our Portfolio
Our Small Cap Portfolio holds aluminium product manufacturer Capral (CAA), the telecommunications group Symbio (SYM) formerly MNF Limited (MNF). We won't give all our Tier 1 stocks away here!
Don't ignore Small Caps in Tier 1!
These should be quality companies. We have many examples of both Small Caps and Blue Chips that are stable businesses. Don't ignore Small Caps in this space. A lot of little companies are excellent quality businesses.
Richard Hemming, Editor
Tier 2 Stocks: Medium Sized Businesses
In our Small Cap portfolio we have 8 medium sized positions, which serve varied roles.
This is the area where the pruning generally occurs. Don't be afraid to sell a stock.
Buy some stocks for forecast growth
The hope is that they grow into larger positions, like the speciality pharmaceutical Medical Developments (MVP) or the crane operator Boom Logistics (BOL), which has already made a decent move.
Check your Diversification
Some stocks in tier 2 should give exposure to different risks for your portfolio, not reflected in the Core. For example you may like stocks that give you US$ exposure, or a small cap financial stock for alternative investment exposure, and a quality Small Cap miner.
Some stocks will have greater exposure to cyclical themes; while others are selected to offer good value, which can include paying substantial dividends.
"Review, Review, Review"
We actively review the stocks in Tiers 2 and 3.
The Idle Speculator, Under the Radar Report's Portfolio Manager
Small Caps Grow
Remember that it's much easier for a small company to double or triple in value than for a Blue Chip to grow by 5-10%. Small Caps are growth stocks and when a small company grows, so does your wealth.
It’s worth pointing out that timing is difficult to perfect. In fact, impossible. Regular readers know that I like to Buy slowly, and if, like Hansen Technologies (HSN) the stock moves quite fast, we may not want to chase the price.
The Idle Speculator, Under the Radar Report Portfolio Manager.
Tier 3: Satellite Small Cap Stocks
We hold 6 smaller positions in stocks that could become tier 2 or even core.
Power in Small Caps
These stocks can really grow! You never know your luck and these small companies can grow into stable Tier 2 businesses.
Each stock is only .5% of your portfolio
We have to be readily prepared to lose that sort of money with no regrets. Nobody, not even Warren Buffett or [INSERT THE NAME OF YOUR MOST ADMIRED INVESTOR HERE], gets them all right, even in bull markets.
Don't invest too much at the start
One key to making money is minimising your losses, which means not investing too much initially.
Reduce your risk
A successful investment portfolio is by definition one where your mistakes aren’t big enough to damage below the waterline.
Grow your confidence
With smaller positions you can start to build up as your confidence in a stock grows.
We have started building up exposure to newer industries, and emerging business models.
The most important component of your future returns is the price you pay for any investment.
The Idle Speculator, Under the Radar Report Portfolio Manager.
FAQ on Building your portfolio of Shares
No investing is risk-free and you can't guarantee that the first stock you pick will shoot the lights out. Through diversification you can reduce your risk and with Small Caps you can buy diversity cheaply.
50% of our Small Caps pay dividends. In a portfolio context, dividends help to pay fees, taxes and provide a tangible return on your money. Stocks that don't pay a dividend, are 100% growth investments. This is not a bad thing, but there is more risk.
Liquidity is a factor in entry and exiting Small Cap stocks. Buy slowly to mitigate liquidity factors. To be cautious, you buy only 10-20% of your anticipated holding to start with, and then you wait. For example, if you plan to invest $2,000 in a stock, you can start and buy $400 worth of shares. Patience is the key.
If a big % of your portfolio is in a small cap, it is often best to take some profits early. It is always best to anticipate news, rather than react to it. This is easier said than done, but if you are reacting to the news, then essentially it’s too late. The bigger your share holding the more important it is to anticipate news.
Your investment risk profile will help you choose the Small Cap stocks that are right for you. Seek independent financial advice and regularly review your financial goals.
Holding shares for a year may make the most sense, because your capital gains tax exposure will be reduced. Please seek independent tax advice.
"One of our key mantras is that subscribers should buy cheap and be patient."
We hunt for cheap Small Cap stocks as buying as cheap as you can will protect your portfolio risk.
You want two or three winners, which are currently small companies (or Small Caps), but which have the capacity to become much bigger.
The flip side is that you will have two or three poor performers. The key here is that your losses are limited, but your gains are not.
Keep some Cash
We like to keep up to 25% in cash so you are always liquid to take advantage of buying opportunities.
Start with one or two stocks and build your confidence. Then you can really start to generate both income and most importantly, capital growth.
Remember to Diversify
Don't put all your eggs in one basket. It's all about building a diversified ASX share portfolio. Small Caps are an important part of this strategy.
Start building your Small Cap Portfolio now
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100% Small Caps
But it’s also possible to invest solely in Small Caps, where you can get a well diversified selection. This is definitely a strategy for those who can handle more risk and volatility. It’s important for us to emphasise that we also recommend that people do not borrow to invest at all, particularly not in individual small caps. And remember to diversify.
If you have never invested before or you are new to investing, start by following our beginner's free guide to investing
Buy quality companies at the right price
The most powerful thing in investing is buying quality companies at the right price. A portfolio approach can generate returns of 10%+ over the long-term.
Buy Quality companies
A combination of ASX Blue Chips and quality Australian Small Cap stocks
Understanding the ASX
There are over 2,200 listed companies on the ASX and the biggest seven represent about half of the $1.3 trillion dollar market capitalisation. These are the big four banks, Rio Tinto and BHP Billiton and Telstra.
Why Small Caps
At the Small Cap end, although there is more volatility, there is more diversity, and more potential to boost your portfolio’s returns.
Doubling in size
It’s must easier for a company with a market cap of $100 million to double and triple in value, than it is for one that is worth $1 billion.
Dollar Cost Averaging
When you build up a holding in a stock over time, you will buy at different prices. Dollar cost averaging is the average price you have paid. This can be a profitable trading strategy.
Blue Chip Price Targets
You can use our Blue Chip Value Report with our Price Targets on over 40 Blue Chip stocks to manage your Blue Chip portfolio.
10 years helping ASX DIY investors
Our independent team of share analysts have over 150 years of collective experience working in the industry.
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