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:
- 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)
- 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.
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