4 Steps to Building a Powerful Portfolio

By Dale Gillham | Published 08 May 2018

While you may think that being successful in the market is about buying and selling, I propose to you that portfolio construction is just as important. So much so that poor portfolio construction will reduce your portfolio returns.  

There are a number of factors that will affect the way you construct your portfolio, which is why it is important to understand that all successful traders have a strong plan for managing a portfolio and so should you. 

So, today I will share with you 4 steps to building a powerful portfolio. 

Whether you’re a beginner or experienced trader, the fundamentals don’t change and having a plan to manage and grow your portfolio will ensure you reap the rewards.

1. What’s your why

The first step to building a powerful portfolio is to understand what your why is. You see, your “why” is a major contributor to understanding what you want to achieve from your portfolio. 

Whether it’s generating supplementary income or growing your capital for retirement. Finding your “why” gives you clarity when it comes to constructing your portfolio.  

2. Active vs passive investing

Whether you’re trading over the short, medium or long term, there is a style of investing that will suit you. 

Understanding your why helps you decide whether you want to be an active or passive investor. If you’re trading to generate more capital in retirements a passive approach to investing may suit you better. 

Alternately, if you are trading for cash flow, you may want to take a more active approach. Either way, the choice is yours but it will also depend on the amount of time you have to put in. 

One of the principles I constantly preach is that trading is about creating a lifestyle, not making it your lifestyle.  

3. Diversification vs di-worsification

This is a concept I introduced in my bestselling book, How to Beat the Managed Funds by 20%

Portfolio diversification is critical when it comes to building a powerful portfolio. You do not want to have all of your money caught up in one investment, otherwise you become exposed to specific risk. 

Specific risk is direct exposure to the threat of a company collapsing. What you want to do is diversify your portfolio by investing in multiple companies across different sectors and markets. so that you are not over exposed to specific risk.  

But this raises the question - how many positions should I hold? I recommend having between 8 to 12 positions in a portfolio. Any more and you end doing what I call “di-worsification”, which erodes your portfolio returns. 

This is the most common issue I find people get wrong with their portfolio, which brings me to step number four. 

4. Risk management

Managing risk is the most important factor for building any portfolio. Having strategies in place to manage your risk is critical to your long term success. 

All good traders have a plan to manage risk.  On average, 80 per cent of traders lose money investing, 10 per cent break even and only 10 per cent profit. This is an alarming statistic because it identifies those who have not managed risk. 

There’s a golden rule that says “cut your losses short and let your profits run”. To manage your risk, all you need to to do is use a stop loss. 

A stop loss is simply an exit strategy if the stock falls away. I recommend setting a stop loss at around 10 to 15 per cent of your initial investment depending on the volatility of the stock. 

Trading successfully is not about how much money you make, it’s about how much money you don’t lose. 

These 4 simple steps to building a profitable portfolio are outlined in much more depth in my book Accelerate Your Wealth - It's Your Money, Your Choice.

When you understand these strategies, you can easily manage your own powerful portfolio.  

If you would like more information on this, you can also purchase my presentation on How to Create a Powerful Portfolio.

So what do we expect in the market?  Watch the video to find out.

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