Deciding the makeup of a share portfolio requires substantial research, discipline, and time management to maintain your portfolio over time.

When starting, you need to determine what you want your share portfolio to achieve. Do you want it to deliver a stream of income that over time will help you be financially independent? Or are you looking for capital gains and expect any dividends received to be directed back into dividend reinvestment schemes to help build your portfolio?

There is no right or wrong strategy, and maybe you will combine your goals for both income and capital growth. Whatever you decide your age will likely play a crucial role.

Younger investors are generally better able to ride out market falls, even severe ones. While any share portfolio will take a hit during a correction, historically the share market has a track record of growth over time. Older investors are more likely to want to protect capital and receive secure income and know funds will continue to flow in during time of turbulence.

Growth stocks vs income stocks

Income stocks are generally offered by more mature companies that have achieved a consistent level of profitability and pay out a high percentage of profits in dividends. Many of these companies will be blue-chip companies, which means they have a track record of performance even during difficult economic periods. Typical stocks in this group include large financial institutions, like the big four banks and large insurance companies, major supermarket and retail chains, and large well-known manufacturers, healthcare, and logistics and building companies.

Growth stocks typically pay small or no dividends, as profits are retained to fuel organic growth or to make acquisitions to gain size more quickly. While the resource sector traditionally offered only growth stocks, the size and stability of major entities like BHP and Rio Tinto has seen these companies evolve into blue-chip income stocks. However, the resources sector remains a highly speculative sector, and many of the smaller players are growth stocks looking for the next big minerals deposit.

The green energy sector is an interesting one. Participants may be large hydrocarbon-based businesses transitioning into renewables, which gives them corporate strength to manage the change. Others may be new players with a limited track record but capture market attention with leading edge renewable projects. However, all players in this area are treading new ground, which means additional caution is warranted, even if the potential upside is huge.

Do the research and be thoughtful

Investing in growth stocks requires solid research. It is an area where many new investors get caught out. Perhaps a family member has suggested a stock to buy, or a friend assures you a company is about to go ‘gangbusters’ with some piece of new technology or service. The investment highway is littered with those that thought they were onto a sure thing, and it turned out to be a long-term proposition or just one that didn’t work out or was poorly implemented.

Always do your own research to understand what a business is proposing. Risk is part of investing, and sometimes you may believe in a corporate vision and back it, even if you know there are significant hurdles to get past. Understanding the level of risk you are taking is a big part of being a successful investor.

When building a share portfolio, you also want to make sure you are not overly concentrated in a particular sector.

Manage risk with diversification

It would not be surprising for a resource sector employee to hear of opportunities in that space. This familiarity could result in a portfolio heavily or even exclusively invested in resources companies. This may work well during a resources boom, but when the sector turns and a ‘bust’ occurs, it’s easy to be caught out and suffer the consequences of being concentrated in one sector. Often a downturn can happen without much warning, which is why one of the most famous phrases in share investing is “don’t try and time the market.”

Whether you’re a property agent heavily invested in property trusts, a young person chasing the next big tech stock, or an older person with a portfolio full of banks, remember another famous investment phrase: “Don’t put all your eggs in one basket.”

By diversifying into a range of companies that are exposed to different parts of the economy, you can be better protected from a share portfolio perspective as markets move up and down. This is because although some stocks in your portfolio may be affected by seasonal factors or a downturn, you can ride out that downturn if other parts of your portfolio perform well.

You are the decision maker 

Of course, you can adjust your share portfolio as you see fit. You may believe a company you hold is in a sector set for a prolonged downturn but currently you are sitting on a substantial capital gain and have received good dividends along the way. You may sell that stock to take advantage of another opportunity you have identified.

If you do not have time to do the research or lack the confidence to make stock selection decisions, there are multiple other avenues you can pursue to build your portfolio. An increasingly popular way of getting market exposure is through Exchange Traded Funds (ETF’s), where a manager will buy a portfolio of stocks that track an index. By buying units in the ETF, investors can participate in the success, or otherwise, of the portfolio. There are also other options, including index and managed funds.

Conclusion

Whatever strategy you choose to build an exposure to the share market, it is also good a good idea to consider what other investments you should make. Diversification is not just about having different exposures to sectors of the share market, it is about ensuring you have different assets that have different performance drivers. This may include asset classes like fixed income, cash products, commodities, and property.

The aim is to have a diversified portfolio that can perform in most market conditions. As you create this portfolio and progress along the learning curve you’ll gain the experience needed to make informed decisions on how to tweak your investments to meet life goals as they evolve and change.

Important Information

The information contained in this article is gathered from multiple sources believed to be reliable as of the end of September 2023 and is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, we recommend that you consider whether it is appropriate for your circumstances and that you seek independent legal, financial and taxation advice before acting on any of this information. ©2023 NAB Private Wealth is a division of National Australia Bank Limited ABN 12 004 044 937 AFSL and Australian Credit Licence 230686.