- Tausif Mulla
Investing Rules to Follow: Building a Strong and Balanced Stock Portfolio
Photo by Maxim Hopman on Unsplash
Investing in the stock market can be a great way to grow your wealth over time, but it's important to follow a set of rules to maximize your chances of success. Here are some key rules to follow when building and managing your stock portfolio:
Keep your portfolio diversified by holding a maximum of 15-20 stocks. This will help to balance out the risk across different companies and sectors.
Allocate at least 4% of your total capital in stock and never invest more than 8% of your total portfolio in a single stock. This will help to spread your risk across different stocks and limit your exposure to any one company.
Balance the risk in your portfolio by investing in a mix of stocks from different industries. Try to have a maximum of two stocks in any one industry and make sure they are opposite of each other in their business operations. For example, you could invest in a safe FMCG company like Unilever and a smaller (but profitable) company such as Marico.
Avoid averaging out bad stocks. If you have a stock that is performing poorly, it's best to cut your losses and move on rather than trying to average it out.
Focus on 5-6 sectors and never allocate more than 25% of your total portfolio to one sector. This will help to spread your risk across different sectors and limit your exposure to any one industry.
If you're a moderate risk taker, invest the majority of your portfolio in blue chip stocks with low debt, as well as midcap and smallcap stocks. This will give you a mix of stability and growth potential.
Consider investing 10-15% of your total corpus in gold. Gold is not dependent on a specific country and its prices do not fluctuate as much as other assets.
Don't invest more than 4-5% of your total portfolio in any one stock. Instead, select a good mix of 20 stocks and stick to this rule.
When picking a stock, focus on the cash flow rather than the PAT (profit after tax). Invest in companies that have high free cash flow on hand.
Don't just sell a stock because the price has gone up. If your research tells you that the company has sound fundamentals and is doing well, continue to hold the stock. This can give you returns of 10X, 50X, or even 100X in the future.
Remember that you make money by waiting and not buying or selling. Try to hold your stocks for a long period of time to maximize your returns.
To cope with market fluctuations, consider building a portfolio that includes both bonds and stocks. When the stock market rises, sell some stocks and put the proceeds into bonds. Conversely, when the stock market falls, sell bonds and buy stocks.
Look for large, undervalued companies that may have been overlooked by the market. These companies may have the capital and resources to ride out any economic downturns and regain profitability.
Choose stocks with a P/E ratio lower than 25x. This will help you avoid overvalued stocks and focus on companies that are trading at a discount.
Diversify your investments using portfolio theory, preferably with a portfolio of 50 stocks. This will help to spread your risk across different companies and sectors.
Avoid herd behavior, overtrading, hot tips, and foolproof schemes. Instead, adopt a long-term investment strategy and stick to it.
Consider using dollar-cost averaging as an investment method. This involves investing a fixed amount of money in a stock at regular intervals, regardless of the price.
In conclusion, following these rules when investing in the stock market can help you to build a diversified and balanced portfolio that is well-positioned to weather market fluctuations and deliver strong returns over time. Remember to keep your portfolio diversified, balance the risk, focus on cash flow, and adopt a long-term investment strategy. By following these principles, you can increase your chances of success in the stock market and achieve your financial goals.
Thank you for reading this post. I hope you found it informative and helpful. If you'd like to learn more about investing in the stock market and other financial concepts, please consider subscribing to our ScroogeMarketer newsletter.