Stockopedia academy

How to build a portfolio

Whether you are setting up your first investment account or improving on your existing portfolio, this series of articles aims to help you build a robust portfolio.

How to build a stock portfolio: First steps

Roland Head

Here at Stockopedia, we’re passionate about investing in shares. Our StockRanks are designed to help you with your research process by highlighting higher probability situations and acting as a framework to help demonstrate what works in investing.

We believe that the best results are likely to be achieved by owning a portfolio of shares, with at least a minimum level of diversification. Both academic and real-world evidence suggest that for most investors, a balanced portfolio is likely to deliver better results with less risk than a more speculative and concentrated approach.

However, the reality is that there’s no one-size-fits-all solution for investing in shares. The right strategy is the one that works for you and fits your circumstances. 

Before you start building a share portfolio, we think it’s worth spending a little time defining your goals as an investor. To help you get started, we’ve included some questions below that might be useful.

There’s also one other point we should mention. 

We don’t give financial advice. But it’s worth remembering that while shares are generally quite easy to sell and convert into cash, being a forced seller at the wrong time can mean accepting a very poor price. You may be forced to realise losses that might otherwise be erased by a market recovery.

In general, we think it makes sense to maintain a cash reserve for rainy days that’s kept separate from your investment portfolio. By doing this, you’re less likely to be forced to sell shares at short notice. Over time, this could make a big difference to your investment returns.

Getting started

It would be easy to assume that everyone who invests in shares simply wants to make money, ideally more than they would make by investing in a simple index tracker. 

In reality, this isn’t always true. And even where it is, there are many different ways to approach this goal.

Your individual circumstances are also likely to have an influence on the approach you take to building a share portfolio.

Here’s a list of questions we think are worth considering before you start buying shares. We’ve divided this into a number of sections to make it easier to navigate.

Financial circumstances

Q: How much money do you intend to invest in shares?

Is this a relatively small amount of your net worth, or a significant part of it?

Q: Do you have other investments as well? How will your share portfolio fit into the bigger picture?

For example, you may already have property assets, an employer pension, or other alternative assets. The answer to this question may influence your choice of investment strategy.

Q: How much money can you afford to lose, if any?

Investing in shares always carries the risk of losses. But some strategies are likely to carry a higher risk of capital losses than others. 

Q: Will you be funding your portfolio with regular deposits – for example from your salary? Or is this a one-off lump sum?

Investment goals

Q: Who are you investing for?

You may be investing for yourself, or perhaps for a partner, children or older family members. Different approaches may be suitable for people at different stages in their lives.

Q: What outcome do you need from your portfolio?

Older investors – or those without other income – may place a higher priority on capital preservation and dividends. Younger investors with many years of employment ahead of them might choose to focus on capital gains or higher-risk speculative stocks.

Q: How much time will you be able to spend researching stocks and administering your portfolio?

This may have a big impact on your investment strategy. For example, a buy-and-hold portfolio of conservative FTSE 350 stocks is likely to require less of your time than a selection of speculative AIM small caps.

Q: What is the expected investment timeframe for your portfolio?

Are you nearing retirement and hoping to build a portfolio of shares from which you will draw down to supplement your income? Or are you planning to invest without withdrawals for a decade or more, building wealth for a later stage in your life?

Alternatively, will your portfolio simply be a vehicle for trading – a pot of cash to play with and use to learn about the stock market?

Investment knowledge and style

Q: How much do you know about stock market investing and financial analysis?

You don’t necessarily need to be an expert analyst to invest successfully in shares. But some basic knowledge of finance and accounting is valuable and may help prevent expensive errors.

Q: Where will you invest? Are you only interested in UK shares, or will you consider investing in the US or other overseas markets?

Stockopedia covers most major international markets, and there’s no doubt Investing internationally can bring new opportunities. However, investing in multiple markets may also add to your research burden. 

Defining your investable universe can be a good way to help manage information overload. The StockRanks can also be a useful tool to help filter out lower-probability opportunities.

Q: What kind of temperament do you have? Are you patient and contrarian, with an appetite for in-depth research? Or are you more likely to want to follow trends, trade actively and rely on momentum?

Honesty is the best policy. There is no single correct answer. Instead, we believe the key to successful investing is to follow an approach you are comfortable with and can sustain over time.

Q: What is your attitude to risk and volatility?

Risk is the possibility of a permanent loss. 

Volatility represents the extent to which share prices move up and down, even if they may be trending in a consistent direction. Some stocks are significantly more volatile than others; our RiskRating ranking system categorises shares based on their expected volatility.

Next steps

You probably already know the answers to many of these questions. We hope that some will be a little more thought provoking.

We’d suggest noting down some answers to use as a reference as you move through the process of building a share portfolio.

In the next article in this series, we’ll run through a selection of popular investing strategies and explain how they might suit different types of investors.

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