Constructing a strong and effective portfolio is never an easy task, and the investor is responsible for continually reviewing his positions and tweaking them to optimise his capital allocation. Aside from trying to maximise gains from the growth of the companies within the portfolio, the investor also has to be aware of risks and be able to position the portfolio to mitigate them. It can feel like an attempt to juggle ten balls with just two hands!
In my years of investing, I have learnt a lot about how to manage my portfolio such that I capitalise on the gains, earn a steady income, and yet, ensure the risks are adequately mitigated. This knowledge was gleaned through an iterative process of learning from mistakes, due diligence on companies, and tweaking individual positions.
Here are three secrets that I would like to share with investors with respect to constructing and maintaining a healthy portfolio, along with examples of my own holdings to illustrate these points.
1. A diversified mix of industries
It’s important for investors to hold a diverse mix of industries that are doing well and show long-term growth trends. The key is to ensure the portfolio is adequately diversified among different industries so that a downturn in any one industry does not hurt the portfolio. An example may be an investor who buys all three banks as well as other companies within the financial sector. His portfolio would be over-exposed to a downturn in the financial industry as he is not adequately diversified.
For myself, I hold positions in Straco Corporation Limited (SGX: S85), Singapore Exchange Limited (SGX: S68), or SGX, Boustead Singapore Limited (SGX: F9D), or BSL, and VICOM Limited (SGX: V01). These provide me with exposure to the tourism industry (Straco), the financial industry (SGX), oil and gas, industrial real estate, and healthcare industries (BSL), and the vehicle and non-vehicle testing and inspection industries (VICOM).
2. The dividend aspect
A healthy portfolio should contain companies that pay regular dividends, as this help to add to the investor’s cash balance. As the cash builds, it allows the investor to have the opportunity to allocate the capital as he sees fit. The dividends can also act as an additional source of income, adding on another layer of passive cash flow for the investor.
My portfolio contains companies that all pay dividends. Some are REITs such as Keppel DC REIT (SGX: AJBU) and Suntec REIT (SGX: T82U), while others are highly cash-generative businesses such as iFast Corporation Limited (SGX: AIY) and SATS Ltd (SGX: S58).
3. Always have cash handy
A third important secret to remember is to always have cash handy to take advantage of opportunities. By this, I mean that an investor should not pump in all his available investible cash into the stock market, as this means he will not be able to jump in and buy shares on the cheap should there be a sudden and unexpected stock market crash.
The ability to take advantage of such market dislocations by allocating capital is one of the most powerful tools an investor can make use of to generate healthy returns for the portfolio and to achieve a deep margin of safety.
The Foolish conclusion
The above three guidelines are just some of the important rules an investor should take note of when it comes to constructing and maintaining a portfolio. Always remember to watch out for your downside and let the upside take care of itself.
The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. The Motley Fool Singapore has recommended shares of Straco Corporation Limited, Singapore Exchange Limited, Boustead Singapore Limited, VICOM Limited, iFast Corporation Limited and SATS Limited. Motley Fool Singapore contributor Royston Yang owns shares in Straco Corporation Limited, Singapore Exchange Limited, Boustead Singapore Limited, VICOM Limited, Keppel DC REIT, Suntec REIT, iFast Corporation Limited and SATS Limited.