How to construct a stock portfolio – do’s & don’ts

By iTrust Financial Advisors (www.itrust.in)

Constructing and managing a stock portfolio is hard. Just ask any professional fund manager. So, what should retail investors keep in mind when it comes to their stock portfolio?

First of all, retail investors must recognize that they are competing against the pros. Therefore, you should not do this if you do not have the time or resources to match the research and analytics done by the pros.

Secondly, you must have an investing philosophy that guides you irrespective of the prevailing market conditions. Recognize whether you are a day trader, punting on every rumour that you come across, or if you are a value investor who buys and holds for at least a minimum of 4-5 years. If you stick to your investment philosophy then you will be disciplined to look at investment opportunities in a consistent way.

Thirdly, understand your risk profile. Are you risk averse? Or are you willing to take on extra risk in order to earn higher returns? High returns aren’t possible without taking on additional risk, and you might not be comfortable with too much risk. Your portfolio should match your risk profile.

Finally, what are you doing towards risk management? This is where the pros really stand out because they understand that managing a portfolio is all about risk management on a daily basis. When the price moves higher or lower than your expectation, do you buy more or do you start selling? Do you recognize that your exposure to one sector or stock might have gone up or down a lot due to market price changes?

Here are some steps that retail investors must take when constructing a stock portfolio?