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Creating an investing portfolio + examples


“There are two ways to be an intelligent investor: by continually researching, selecting, and monitoring a dynamic mix of stocks, bonds, or mutual funds; or by creating a permanent portfolio that runs on autopilot and requires no further effort (but generates very little excitement).”

This quote from Benjamin Graham is still pretty accurate today. If you want, you could make thousands of different portfolios. The question is:

  • Do you have the time to do all the research?
  • Do you want to spend the time to do all the research?

It simply takes a lot of time to do the research and pick your own stocks, bonds or other securities. If you are not excited about this at all, how long before you throw in the towel? There are many tools out there that certainly help you reduce the time needed to make basic stock evaluations. At Penke Trading you can find various tools that help you to determine the health of a company. But the research does not end there. Using tools to pick stocks is a great idea but before using the tool you should know in depth what the tool is actually showing. Never trust a single tool, always verify calculations. And never follow any advice a trading tool gives you. It's a great place to start with but as you learned there is more then just numbers and basic ratio's.

When creating a portfolio, you can pick a mix of many different options:

  • Growth stocks 
  • Value stocks
  • Dividend stocks
  • Defensive stocks
  • Blue chip stocks (stocks from large well known companies that exist for decades and have healthy financials in good and bad times)
  • Bonds
  • ETFs (Indices)
  • Mutual funds
  • Commodities

While there is some overlap (ETFs and mutual funds mostly consist of stocks and bonds), all have a specific role when creating a portfolio. When creating a portfolio, you do have some options:

Portfolio type Risk/Reward Time needed to inspect and rebalance portfolio
Zero effort Low risk, low/medium reward Low (once or twice a year at most)
Defensive Low risk, low reward Medium (multiple times a year)
Balanced  low/Medium risk, Medium reward Medium (multiple times a year)
Enterprising High risk, high reward High (many hours every week)

According to Graham, you have to choose. If you want to find out everything yourself you should go full enterprising. If you don’t have the time or don’t want to spend the effort then you should go defensive or zero effort. As an enterprising investor, you must have the training and know what you are doing. Otherwise it’s better to go on autopilot and pick defensive. This is just a general guideline. The beauty of investing is that you can do whatever you like. As long as it matches your goals. If you already panic when seeing red numbers then maybe picking your own stocks is not the best idea.

As mentioned before, your age is an important factor. Benjamin Graham recommends subtracting your age from 100 and that is the amount in percentage you should invest in enterprising stocks at max. For example:

  • Age 45; 100 - 45 = 65% in enterprising stocks and 45% in balanced/bond/cash/gold

Of Course, this is just a guideline. You can basically do whatever you want. But it makes sense to go for something to fall back on. A combination of stocks, bonds and commodities might be a good foundation. When the stock market is falling, bonds will outperform stocks. When stocks are doing well, bonds perform less but also have low risk. Commodities like gold have a track record of a solid investment. Let’s create a few portfolio’s based on various ages:

Important note: the following portfolio’s are just informational and general guidelines. Always do your own research or consult an expert. Every portfolio regarding handpicking stocks should have at least 30 different stocks from different industries. Do not use any of the below portfolios for personal use.

Portfolio A, Enterprising:

  • 25% gold / ETF (bonds) / cash
  • 50% enterprising stocks (at least 30 different stocks from different industries)
  • 25% cryptocurrencies

When you are 25, you can take more risk because you have a lifetime of investing ahead. Taking more risk does not mean pouring in all your savings. Only the money you put aside based on your personal situation. If you are not sure if your personal money management is up to date, read my guide on personal money management.

Enterprising stocks and cryptocurrencies are risky investments. They can be very volatile. But that also makes them exciting and can bring potentially huge profits. Enterprising stocks can be divided in a few categories:

  • Growth stocks
  • Bargain stocks
  • Special situations

As a reminder, growth stocks are stocks from companies that have the goal to grow and trade above average market prices. For investors this means making money through capital gains (rise in stock price). That also means investors only make money when they sell the stock as growth stocks often do not pay any dividends. 

Bargain stocks are stocks that are trading below their intrinsic value. The task of the investor is to find out if the price is correct and if it’s really a bargain or if something else is going on. Companies trading below their intrinsic value can bring profits in the future.

Special situations are stocks that are not based on any general calculation. This might include arbitrage options or small companies that have a high chance to be taken (bought by) over by larger firms. This could also include stocks that suddenly rise exponentially due to local or global events. Think about moderna, the vaccine company using mRNA vaccines. Due to covid-19 moderna went from $8 billion value to $180 billion at the peak in just two years. Travel and airlines companies on the other hand all collapsed because of travel restrictions.

Why are cryptocurrencies included? Because they might be the future. It’s another form of diversification of your investment. Cryptocurrencies are highly volatile and thus very risky but also have high rewards. Much higher than any stock. They are also unregulated making them even more risky. But remember, if you have no clue what cryptocurrencies are and you don't want to invest any time in them then simply don't buy them. On the other hand, investing in cryptocurrencies produces the most millionairs in history. Just be aware of the risks and never use money you can't afford to lose. If you want to know more about cryptocurrencies, there are a few links to in-depth articles below.

As a reminder, enterprising stocks are all stocks that require a large amount of your time to determine if the stock fits your needs. 

Last but not least are cash, gold and ETFs. These can act as a margin of safety.  ETFs tracking indices like the S&P 500 can still be risky but give moderate returns in the long run. Gold is still seen as a strong investment. Although you most likely lose buying power every year due to inflation, cash can still be a solid investment. You can also use cash to buy in huge dips for max profits. If you had some cash at the side when covid-19 started surging (march 2020) you could have bought in relatively cheap and made huge profits the months after. A real life example can be found here.

But you can also decide to go 100% enterprising stocks or 50% enterprising and 50% crypto. Whatever fits your goal best.

Portfolio B, Defensive:

  • 16.7% cash / bonds / gold
  • 33.3% blue chip stocks
  • 50% defensive stocks (at least 30 different stocks)

According to Graham, defensive stocks are based on the following:

  • Not less than $100 million of annual sales
  • Current assets should be at least twice current liabilities
  • Long-term debt should not exceed the net current assets
  • Some earnings for the common stock in each of the past 10 years
  • Uninterrupted dividend payments for at least the past 20 years
  • A minimum increase of at least one-third in per-share earnings in the past 10 years
  • Current price should not be more than 15 times average earnings
  • Current price should not be more than 1½ times the book value
  • Price to book value should not exceed 22.5.

These values can be ajusted to more current ratio's (Graham used these numbers many decades ago and might not be usefull today).

Defensive stocks are sometimes overlapping with blue chip stocks. As blue chip stocks are very large, commonly known companies. These have solid financial foundations and are considered pretty safe investments. A small amount of the portfolio can be dedicated to cash, bonds or stocks or go 100% blue chip / defensive stocks.

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Portfolio C: Maximum risk

  • 50% enterprising stocks (at least 25 different stocks)
  • 25% cryptocurrencies
  • 25% derivatives

If you want to have maximum rewards you have to be aware you also encounter higher risks. While many risks can be mitigated by doing research, the biggest pitfall are your emotions. Risky investments are more susceptible to making wrong decisions. Because most risky investments are very volatile. Cryptocurrencies can drop 50% or even more in just a single day. Derivatives require a very good mindset and insights about the future. And growth stocks require much research. Most traders are trading too much because they include their emotions. 

A maximum risk portfolio is only recommended for the seasoned veteran. A veteran knows how to react to movements in the markets and has understanding of both technicals and fundamentals. The maximum risk approach requires the highest amount of research. 

If you want to take maximum risks in the short term, you can consider day trading.

Portfolio D: Zero effort

A zero effort portfolio consists of ETFs, blue chip stocks and very liquid low risk securities like cash and bonds. These require almost zero investigation. It’s simply buy and hold. The safest bonds are treasury bonds. These bonds are backed by the government. The bond market is 100% larger than the stock market. It’s the most liquid market in the world after cash. Gold has done fairly well over the years and is considered a safe investment. But always be aware that any investment, no matter how safe it sounds, can go down. For example, when looking at the historical price of gold:

If you bought gold in 1980, the price dropped 300% in 20 years. While if you bought gold in 2000, the price went up 300% in 20 years. But, if you continuously bought gold from 1980 till 2000, you would have made huge profits in 2002 and beyond. But that is measured over four decades. Just to show you it does not only matter what you buy, it also depends on what buying and selling strategy you are using. I will cover this more in depth later on.

For a zero effort investor there are two main options:

  • ETFs
  • Blue chip stocks

ETFs have very low cost and require almost zero effort to maintain. You can basically pick an ETF that follows the S&P 500 and never touch it again. Blue chip stocks are stocks from large well established companies. Think about  Apple or Coca Cola. These companies are massive and will never go bankrupt anytime soon. They have proven track records and are considered safe investments. Buy always do your research before buying. Although blue chip stocks have a proven track record, that does not mean they can't be overpriced.

Portfolio E: Maximum risk 65 years old

  • 25% enterprising stocks (at least 25 different stocks)
  • 15% cryptocurrencies
  • 60% bonds / ETF / gold / cash

A maximum risk portfolio for someone who is 65 years old looks completely different. This person should only take 35% in risky investments and hold 65% in relatively safe investments like ETFs, gold, cash or bonds. At age 65 you simply can’t take huge risks because most people will be retired and already have less income. But a seasoned veteran who is already trading and investing for decades will find it no problem to allocate 90% or 100% in risky investments. 

Above portfolio’s are just a few examples of how you can create and diversify your own portfolio. While cryptocurrencies are hot right now (2022), they may be obsolete in 10 years because they are forbidden or heavily regulated. Then your portfolio allocation changes and will incorporate the next hot investing thing.

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29.1. Rebalancing your portfolio

Another important thing is rebalancing your portfolio. This is not really needed for zero effort portfolio’s but definitely needed for enterprising or high risk portfolios. That means you should check your portfolio on a regular basis multiple times a year. This depends on the markets you invest in and global or local events. Risky stocks also mean they can go down just as quick. It's useless to hold underperforming stocks in your portfolio. It's just as important to know when to sell than when to buy. Rebalancing also depends on your strategy and your goals. But consider this to be a crucial part of your investing journey. Once you start, you can’t stop.

Key Concepts:

  • Investing portfolios are created based on your age, goals, amount of risk you want to take and amount of time and money you want to invest.
  • Age is a crucial factor when creating an investing portfolio. The older you are, the less risky investments you should have.
  • Rebalancing your portfolio is crucial when picking your own stocks and other securities.
  • When handpicking stocks, pick at least 30 different stocks from different industries.

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