Do you need tips for building a balanced portfolio? If so, this article is aimed at you
Building a balanced portfolio can include a mix of growth and value stocks, big and small stocks, and so on. But most important, it should be balanced across most if not all of the five economic sectors.
What constitutes a well-balanced portfolio depends in part on your investment objectives and financial circumstances. Here’s how to do that:
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Building a balanced portfolio using our five sectors
Here are some tips on diversifying your stock portfolio:
When it comes to a diversified stock portfolio, stocks in the Resources and Manufacturing & Industry sectors in general expose you to above-average share price volatility.
Stocks in the Utilities and Canadian Finance sectors entail below-average volatility.
Consumer stocks fall in the middle, between volatile Resources and Manufacturing companies, and the more stable Canadian Finance and Utilities companies.
Most investors should have investments in most, if not all, of these five sectors. The proper proportions for you depend on your temperament and circumstances.
Conservative or income-seeking investors may want to emphasize utilities and Canadian banks for their high and generally secure dividends.
More aggressive investors might want to increase their portfolio weightings in Resources or Manufacturing stocks. However, you’ll want to spread your Resource holdings out among oil and gas, metals and other resources stocks for diversification within the sector, and for exposure to a number of commodities.
Building a balanced portfolio: Buy good stocks, rather than trying to pick market tops and bottoms
In hindsight, it always seems easy to spot market tops and market bottoms. But trying to spot those tops and bottoms as they occur is harder. We have investigated all sorts of market theories and signals that purport to tell you how to do it. They all seem to have “worked,” at least some of the time. But none worked consistently.
The problem is that market tops and market bottoms can take place in response to anything that is going on in the market, the economy and the world. But buy and sell signals focus on a tiny smidgen of that vast amount of data. A market signal “works” when the market is responding to the same slice of data that the signal focuses on. It quits working as soon as the market’s focus moves on to something else.
Investors who succeed over decades—the Warren Buffett’s of the investment world—rarely, if ever, talk about spotting market tops and bottoms. They are far more likely to talk about successful investments than successful market predictions. Most have come to see, often after a period of costly stock-trading errors, that you make most of your stock-market profits through stock selection rather than stock-market predictions.
As an aside, some investors have asked: Why do we not sell stocks that shoot up quickly, and then buy them back in a month or two when the market is lower? There are several reasons: for one, the market may not go down. For another, when the market is headed for a rise, the best performers in that rise will often begin rising much earlier, and much quicker, than the market averages.
Building a balanced portfolio: 40 stocks is a good upper limit
When you get above $200,000 or so, you can gradually increase the number of stocks you hold to 15 to 20 stocks. When your portfolio reaches the $500,000 to $1-million range, 25 to 30 stocks is a good number to aim for.
Of course, you may fall a few stocks below that range, or go a few above it, particularly when you’re making changes to your holdings. That won’t matter if you follow our three-part prescription of mainly investing in well-established companies; spreading your money across most if not all of the five main economic sectors; and downplaying stocks that are in the broker/media limelight.
Our upper limit for any portfolio is around 40 stocks. Any more than that, and even your best choices will have little impact on your personal wealth.
Simple question. When balancing a portfolio do you use the book value or the current value? I use the book value and ignore any ups or down in the market price but some times there can be vast differences in the two numbers.
It’s not clear to me what Warren Buffet would not do after reading this article. When using such a punchy title, it would be nice if the article was just as punchy and that it directly address the subject suggested by the title. As written, it disappoints.
To rebalance your portfolio, Pat McKeough still thinks you should stick with his three-part program:
1. Hold mostly high-quality, dividend-paying stocks.
2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
3. Downplay or stay out of stocks in the broker/media limelight
Pat says that there are a number of difficulties with recommending a model portfolio for all investors. The main one is that each individual has different objectives, acceptable risk levels and so on. For example, conservative or income-seeking investors may want to emphasize utilities and banks for their high and generally secure dividends. More aggressive investors might want to increase their portfolio weightings in resources or manufacturing stocks.
As well, any model portfolio would need to be continually monitored and updated as individual stocks rise and fall in value and as a percentage of the total.
In addition, different investors may be more comfortable holding a larger or smaller number of stocks, REITS or ETFs in their portfolios. So it’s difficult to set any specific number of stocks in a model portfolio.
However, as mentioned, conservative or income-seeking investors may want to emphasize utilities and Canadian banks for their high, generally secure dividends, but you’ll still want to spread your investments out across the five main economic sectors: Manufacturing & Industry, Resources, Consumer, Finance and Utilities.
You’ll want to consult the Portfolios at the back of The Successful Investor and Wall Street Stock Forecaster newsletters for Pat’s top recommendations in each sector.
When Pat updates his stock recommendations each month, he looks at all the buys and pick out the stocks that he thinks have the best prospects for long-term gains at that moment, based on everything he knows about them and everything he knows about investing. These are his Best Buys, and they should be your first choices for new buying. In choosing among them, however, you still need to think about your own investment objectives and risk tolerance, as well as the balance and diversification of your portfolio.
In Power Growth Investor, Pat analyzes more aggressive stocks. He says they should make up no more than around 10% of a portfolio for conservative investors, or up to, say, 30% for more aggressive investors. That’s because even his Best Buys from among these stocks expose you to greater risk of permanent loss. Stocks in the Successful Investor and Wall Street Stock Forecaster Aggressive Growth Portfolios tend toward this end of the spectrum, although they are for the most part quite a bit less speculative than those in Power Growth Investor.
Pat’s view is that virtually all Canadian investors should have 20% to 30% of their portfolios in U.S. stocks he recommends in Wall Street Stock Forecaster. You could add some foreign exchange-traded funds (ETFs), such as those he recommends in Canadian Wealth Advisor, in reasonable quantities: perhaps 10% of your holdings if you are a conservative investor (including 5% or so in higher-risk funds, such as emerging-market ETFs).
One last point on rebalancing:
Typically, we advise that a stock shouldn’t make up more than, say, 5% of a portfolio. However, it could make up as much as 10% if the value rises and it’s not a risky or speculative stock.
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Simple question. When balancing a portfolio do you use the book value or the current value? I use the book value and ignore any ups or down in the market price but some times there can be vast differences in the two numbers.
Thanks for your question. We recommend using market value to get the most accurate snapshot of your portfolio to determine your portfolio balance.
It’s not clear to me what Warren Buffet would not do after reading this article. When using such a punchy title, it would be nice if the article was just as punchy and that it directly address the subject suggested by the title. As written, it disappoints.
share price Volatility ,It’s VOLUME! NOT PRICE that matters always!
Thanks, Don. We have long advised TSI investors to avoid focusing on a stock’s price, or its p/e, to the exclusion of other key variables.
I’d love to see an article on re-balancing a portfolio.
Thanks for your question.
To rebalance your portfolio, Pat McKeough still thinks you should stick with his three-part program:
1. Hold mostly high-quality, dividend-paying stocks.
2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
3. Downplay or stay out of stocks in the broker/media limelight
Pat says that there are a number of difficulties with recommending a model portfolio for all investors. The main one is that each individual has different objectives, acceptable risk levels and so on. For example, conservative or income-seeking investors may want to emphasize utilities and banks for their high and generally secure dividends. More aggressive investors might want to increase their portfolio weightings in resources or manufacturing stocks.
As well, any model portfolio would need to be continually monitored and updated as individual stocks rise and fall in value and as a percentage of the total.
In addition, different investors may be more comfortable holding a larger or smaller number of stocks, REITS or ETFs in their portfolios. So it’s difficult to set any specific number of stocks in a model portfolio.
However, as mentioned, conservative or income-seeking investors may want to emphasize utilities and Canadian banks for their high, generally secure dividends, but you’ll still want to spread your investments out across the five main economic sectors: Manufacturing & Industry, Resources, Consumer, Finance and Utilities.
You’ll want to consult the Portfolios at the back of The Successful Investor and Wall Street Stock Forecaster newsletters for Pat’s top recommendations in each sector.
When Pat updates his stock recommendations each month, he looks at all the buys and pick out the stocks that he thinks have the best prospects for long-term gains at that moment, based on everything he knows about them and everything he knows about investing. These are his Best Buys, and they should be your first choices for new buying. In choosing among them, however, you still need to think about your own investment objectives and risk tolerance, as well as the balance and diversification of your portfolio.
In Power Growth Investor, Pat analyzes more aggressive stocks. He says they should make up no more than around 10% of a portfolio for conservative investors, or up to, say, 30% for more aggressive investors. That’s because even his Best Buys from among these stocks expose you to greater risk of permanent loss. Stocks in the Successful Investor and Wall Street Stock Forecaster Aggressive Growth Portfolios tend toward this end of the spectrum, although they are for the most part quite a bit less speculative than those in Power Growth Investor.
Pat’s view is that virtually all Canadian investors should have 20% to 30% of their portfolios in U.S. stocks he recommends in Wall Street Stock Forecaster. You could add some foreign exchange-traded funds (ETFs), such as those he recommends in Canadian Wealth Advisor, in reasonable quantities: perhaps 10% of your holdings if you are a conservative investor (including 5% or so in higher-risk funds, such as emerging-market ETFs).
One last point on rebalancing:
Typically, we advise that a stock shouldn’t make up more than, say, 5% of a portfolio. However, it could make up as much as 10% if the value rises and it’s not a risky or speculative stock.