How to build the perfect portfolio is a widely-debated topic, with many different opinions regarding the matter. Most financial advisers will tell you to invest 7% - 8% in each stock and to be diversified, which basically means to have a variety. We will discuss how to build the perfect portfolio without a "one system fits all" strategy. I will discuss several stocks that are both good for short, long, and everything in between-- along with percentages to better position yourself for success.
I have never agreed with the 7-8% holding rule within a portfolio. When I first began investing I was starting with roughly $5,000. Although investing with the 7% rule would have limited my risk, it was not going to grow my portfolio at the speed that I desired. The way a portfolio is divided should depend on the size of the portfolio and not a "one system fits all." With a $5,000 portfolio I was 19 years old, using money that I had saved while working in college-- and I was using it as a way to educate myself about the market. But over the years my goals have significantly changed and my willingness to take risk has declined. Therefore, as your portfolio grows your goals change as well.
Below is a general guideline that I have always used as my portfolio has grown through gains and additional investments. The chart shows what I believe is the best way to divide a portfolio by the total number of holdings to give the highest potential for gains while minimizing risks.
|Portfolio Value||Number of Stocks|
|$5,000 - $10,000||2 - 3|
|$10,000 - $20,000||4 - 6|
|$20,000 - $50,000||7-10|
|$60,000 - $100,000||11-14|
|$100,000 - $250,000||15 - 20|
|$250,000 - $500,000||20 - 30|
Dividing Your Portfolio
There is no standard or correct way to diversify or divide your portfolio. There are too many factors involved for one standard method. My goal is to maximize the reward while minimizing the risk by purchasing shares that present value, or that have fallen for reasons that are not related to the company. Yet someone else who is near retirement may wish to minimize risk but most likely still desires a decent reward, therefore this person may prefer bonds or cash. It's impossible to give a formula that will work for everyone, yet I have had success with the formula above.
I currently hold 15-20 stocks at any given time and diversify the stocks based on my long-term goals. My idea of diversification is much different than the average investor, and I won't say that it will work for everyone but it has worked for me. When most people think of diversification in a portfolio they are speaking of a variety of stocks, mutual funds, bonds, emerging markets, etc. Along with having a variety of securities in all sectors or industries to limit risk. I use diversification in my portfolio to invest in stocks with different levels of potential rather than a variety of industries or sectors. I have been investing in stocks with this concept for the last two years, when I was forced to change my investing strategy as my portfolio became larger.
I place investments into six categories and utilize each in my portfolio. Each has a purpose ,and -- rather than concentrating on diversifying with different industries -- my goal is to diversify my portfolio with the type of stocks that I choose. And like I said, this isn't for everyone, but I have tried various strategies over the last few years and I am yet to find one with returns such as diversifying your portfolio with stocks that serve a different purpose. Below is a chart of the six categories of stocks that I use in my portfolio along with the percentage of my portfolio that each category represents within my portfolio.
Short-Term Growth Stocks
The difference between short-term value and growth stocks is the position of the stock. When I buy stocks for value I'm buying stocks below their worth, that have traded significantly lower despite growing fundamentals. With growth stocks I'm buying securities with a high level of momentum that are trending higher. In a previous article I covered short-term value stocks, and explained it as stocks that have trended significantly lower as a result of the market's trend despite strong fundamental progress. Growth stocks are similar yet different, because with growth stocks I am purchasing stocks that have relatively low valuations, however I am purchasing stocks that are trending higher. Surprisingly, what I've learned is that this group of stocks returns the highest gains of any other within my portfolio. Therefore I have listed 6 stocks that are great short-term growth stocks that have posted gains but still have more gains ahead.
The chart reflects the five year performance of Intel (NASDAQ:INTC). Intel rarely shows large movement in its stock and has traded in a fairly consistent range over the last two years. But as you can see, the stock recently broke through its range and trended past $25. The strong movement in the company's stock was a result of an exceptional earnings report in which revenue increased by more than $3 billion and income posted a gain of 17% year-over-year. However, after two days of loss within the market the stocks are now trading slightly lower. I'm still encouraged, and believe that the stock will trade higher and that its slight pullback was because of market conditions and not fundamentals. Because of its exceptional earnings report the stock could possibly test new highs in the coming weeks. Therefore, INTC is a safe investment with substantial upside during the immediate future.
Mastercard (NYSE:MA) is a stock that I've owned for approximately 5 months that was initially purchased as a short-term value investment. However, after a $90 increase in its price and the fact that it keeps trending higher, I now consider it to be a short-term growth stock. The stock has performed exceptionally well against the financial sector over the last year, and I believe that it will continue to rise as the market improves. The stock has limited volatility. Because of its price it's rarely manipulated and doesn't react to economic events within the market. The stock is trading near all-time highs after posting earnings that continued to improve. Therefore, I am undecided on when I will sell the stock but I plan to decrease my position when the stock passes $400 despite its greater upside potential.
The only financial stock that could be better positioned for gains than Mastercard is Humana (NYSE:HUM). Much like Mastercard, Humana has posted solid gains over the last year and has traded against the market during sell-offs. However, the company differs from Mastercard in growth and valuation. Humana is actually growing faster than Mastercard and trades at half the price-to-earning, along with having high institutional ownership.
The deciding factor that caused me to purchase MA was the company's debt-to-assets ratio. Although Humana has a solid debt-to-assets ratio it's still much higher than MA, which has no debt. In this volatile market, a company's debt can come back to haunt it when the market turns for the worse. Humana has traded slightly lower over the last three days, after reaching 52 week highs. If the company can recover and trend higher, I will initiate a small position when it trades over 52 week highs.
Every investor should own a small (or large) position in a specialty coffee stock. Coffee is one of the faster growing commodities in the market and a growing obsession among consumers. If you're going to buy a coffee stock then you might as well go with Starbucks (NASDAQ:SBUX), which shows consistent growth and solid fundamentals. Starbucks' five year chart shows that it's been trending higher since 2009 and is now trading near all-time highs. But much like Humana, it was trading at all-time highs just a few days ago yet strong selling pushed the stock slightly lower. Therefore, the stock is presenting a good opportunity. Since it trades in one of the best performing sectors and is showing no signs of slowing growth, it will create new highs, much higher than its current price.
Panara Bread (NASDAQ:PNRA) is one of my favorite restaurant stocks with strong growth, low volatility, and a consist upward trend. The company is growing very quickly with revenue that increased 21% and income that grew by 26% year-over-year during its most recent quarter. The company is expanding and always has a full store of customers, therefore there is no reason to believe that it won't continue to grow. The stock is trading slightly lower than all-time highs, and I think that when the market trends higher it will surpass previous highs.
Questcor Pharmaceuticals (QCOR) is by far my favorite biotechnology company within the market, with gains that are just getting started. This company has been one of the fastest growing stocks of the last 5 years. In fact, if you would have purchased shares in June of 2007 worth $5,000, your investment would now be worth more than $400,000.
Due to these high gains, many investors believe the stock will now decline and has reached resistance. However I disagree, the company's drug, ACTHAR, is a transcendent medication that is unlikely to be replicated by a generic and is yet to achieve anywhere near its full potential. The market for the conditions that ACTHAR can treat is large and the number of patients that use ACTHAR is relatively small. Therefore, this company has unprecedented upside. Considering that it's increased its sales team from 5 to 28, I expect accelerated growth over the next 12 months. The stock is currently trading $2 less than its all-time high, which presents an opportunity for investors to purchase shares before the stock begins to rise.
My investment paradigm is value investing and my natural tendencies are to search for stocks that are trading lower as a result of the market, despite improved fundamentals. My ability to seek and find value within the market has led me to success in a short period of time, therefore it's very difficult for me to purchase a stock near 52 week highs. Most investors were taught that buying low and selling high is the most effective method to invest in a company. I most definitely agree, however, this strategy of purchasing growth stocks has returned large gains and will continue to do so if you seek value in fast growing stocks. There are several stocks that are trading with low valuations and posting high earnings, yet are trading near 52 week highs. These stocks-- much like the ones above-- present a high level of value. Because of their positive momentum these have a greater chance of trending higher rather than trending lower.
Disclosure: I am long MA.
Additional disclosure: As with any investment, due diligence is required. The opinions in this article are not intended to be used to make a particular investment or follow a particular strategy but rather informational purposes only.