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Advice for a new investor

Albert and I are currently providing some support to two friends who are beginning their investing journey. One has a fairly clear idea of his approach, the other is more open-minded to recommendations. They’ve both subscribed to Motley Fool Stock Advisor, so this will be really helpful as they undertake their own independent research.

Albert and I spent this morning debating what our own model portfolio would look like – if we were starting out from scratch today, how would we build a portfolio of 10-20 stocks to begin our investing journey.

There are really two parts to the question, what should I buy, and how should I buy it – the latter factor is particularly relevant in the current climate, where markets are very likely to be overvalued compared to fundamentals, particularly macro-economic factors such as the current high level of unemployment, which I don’t feel has been fully priced into valuations.

So, if I were creating a portfolio from scratch today, I think it would certainly include a selection of stocks from the following list, categorised as high / medium / low risk:

High: Shopify, Tesla, Twilio, Zoom

Medium: Intuitive Surgical, MercadoLibre, NextEra, Illumina, Netflix, DocuSign

Low: Walt Disney, Amazon, Alphabet, Mastercard

With honourable mention also going to The Trade Desk, Fastly, TelaDoc, and Square.

There are a few in that list that are probably must-haves in the current Coronaconomy, but as a long term holding, I’d be pretty comfortable with any starter combination of those – perhaps at least ten picks just to get a bit of diversification.

To the question of how should I buy, I think it’s useful to note the following factors:

  1. The need to avoid over-exposure to any one company, or a single key PESTEL factor (political, environmental, social, technological, environmental, legal or ethical risk)
  2. The preference to dollar cost average while building an initial portfolio, reducing volatility if there is a major market correction

A number of published analyses of portfolio construction tend to indicate that it’s actually mathematically better to just jump in with both feet first, taking up a full position immediately (if funds permit), rather than dollar cost averaging into the market. However I would suggest that this be avoided by a new investor, who wishes to build their confidence in investing in individual stocks, and could probably do without the emotional turmoil of seeing their entire portfolio impacted if there is a general market correction. If you’re partway through your DCA journey, you actually want the market to fall, as you are a net buyer, and so prefer getting better value points on your future purchases.

So with that in mind, as a buying strategy, we would actually suggest dividing the initial investment funding into twelve lots, and building the initial portfolio over the course of a year. A key limiting factor on this would be the total amount available for investment. If twelve purchases actually pushed trading fees above 1%, it would be preferable to start with fewer bigger investments.

The advantage of this approach for a new investor is that it also provides a longer period of reflection and research prior to each purchase, rather than just taking our list on faith that it’s correct on day one.

2 comments

Just to comment on my own post following a recent chat with a friend, right now I personally think Shopify, Mercadolibre, Docusign, and Fastly all have a long way to run – all have at least 5x potential from current market cap over the coming ten years. Welcome conflicting views

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