How I construct my portfolio

When we start investing we’ll usually start with a single exchange-traded fund (ETF) or stock. But as our investments grow, we need a plan as to how our overall portfolio will look.

So this week I’ll delve into how I construct my portfolio, which ultimately is broken up into six different parts. Importantly, all these parts sit within different accounts, but my broker lets me have multiple accounts under one login. My broker also only charges me one admin fee.

Having each different portfolio in a different account makes things clean, especially when it comes to tracking each one’s performance.

ETFs

I always start with my core ETF portfolio. This is around half of my total investments and I never sell these ETFs unless they turn out to be busted, but that’s a discussion for another column.

The beauty of the ETF portfolio is that it gives me market performance with the only risk being the market; the other portfolios carry extra risk in that I may buy the wrong stocks and hold on for too long.

The average person’s portfolio can consist entirely of ETFs, and they can sleep easy knowing that these securities will create wealth over time. However if you’re reading this, you have ambitions beyond just an ETF portfolio and I have five others.

My forever stocks

Next is my “’til death do us part” portfolio. Here I put the absolute best stocks, those awesome companies with awesome management teams I am always talking about.

I have 10 to 12 stocks in this portfolio and ideally I would never sell them, unless they die on me. Over the decades I have done a few sales, some well timed, but others not so much. With this part of the portfolio price does not bother me at all (except when buying as I want to buy cheap), I am only interested in how the long-term fundamentals of the companies are doing. If they are falling in price I will simply buy more. But if the fundamentals change for the worse then I will be selling.

This portfolio is about another 30% of my holdings.

Second-tier portfolio

This portfolio mostly has mid- and small-cap stocks. I’ll hold three to five shares here. Sometimes these stocks move up into the “’til death do us part” portfolio but most often I sell them. These would be cyclical stocks that may be great to own for a while, or smaller ones with potential but that need to prove themselves.

Examples here are Calgro M3* and Santova*. Famous Brands* started life in this portfolio but got upgraded a few years ago. I have about 10% of my investments in this portfolio and selling would be based on price or fundamentals. I will often hold stocks here for many years.

Three trading portfolios

The final 10% of my holdings goes into three trading portfolios: my weekly lazy, Alsi lazy and momentum portfolios. They are higher risk, but if my strategies pay off, the reward is also greater. Only a small portion of my entire stocks is in this section due to the increased risks.

Each of these portfolios has a different methodology. They also differ from the other ones in a number of ways. Buying and selling is based on technical systems rather than fundamentals. The sales will often be at a stop-loss level – a downside price I will sell at with zero questions asked, as I need to protect my capital. One could also use derivatives, although I only do a small amount of derivative trading using All Share Index (Alsi) futures. 

One can construct a portfolio in a number of different ways and this is just my example, but what is important is that we have a plan and that we implement the plan. 

*The writer owns all the stocks mentioned here.

This article originally appeared in the 14 July edition of finweek. Buy and download the magazine here.

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