Investing 101: How to Build a Stock Portfolio?

May 7, 2020 Posted by : Jorge Cardozo
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When it comes to investments, people usually start building their portfolio with stocks. Data from this investment vehicle is more popular, accessible, and appealing to many individuals. Who wouldn’t want the possibility to own a company anyway? 

However, most of the time, investing or setting a portfolio allocation requires a financial advisor or an investment platform that supports you as you grow your investments in the stock market. From my experience working as an investment strategist, and discussing with most of the biggest banks around the world, the following is the standard composition of a stock portfolio:

What does a standard portfolio look like? 

US (50%-60%); Europe (20%-25%); Japan (4%-6%); Emerging Markets (EM) (25-10%), where the ranges will depend on the risk profile for each investor. This composition might vary slightly from bank to bank: some will have Develop vs Emerging countries; some will have China apart from EM; others will have Asia ex-Japan, etc.  

In 100% of the times, the investment advisory from large institutions will also include wider segregation, where market capitalization is used as a first filter. Large caps vs small caps. Usually, and also dependent on the risk profile, a moderate portfolio will hold 75% of the US Stocks in large caps and the 25% left will be small and mid-caps. Large caps tend to be more stable in terms of revenues, while small caps are still finding their way to a more steady and diverse income. Beware that exposure to small caps can carry higher volatility too.

Usually, for Europe, Japan, and EM, large banks do not disclose the composition for large and small caps. As for Europe and Japan, the same ratio as used in the US (75/25) was maintained, while for EM the volatility was already high enough. 

The suggested portfolio could also include a preference for a specific sector. How does it work? Some years, fundamentals in economy, regulations, and momentum work better for some specific sectors. To capture this potential upright, the portfolio might overweight/underweight a sector according to the outlook. 

The way to do this is by using mutual funds or ETFs that invest in companies exclusively in this sector. Most of the time, these additions to the core portfolio are known as a satellite investment. These types of investments are more opportunistic than strategic, as a shift in economy could imply changing the weight in the portfolio.

What is rebalancing? 

Once it is built, you must check it at least once every quarter, something that is called rebalancing. Why? The idea of the rebalancing is to make sure that nor your fundamentals or the composition of the portfolio has changed, so you would be aligned with the initial hypothesis for higher returns. 

If the characteristics and data (fundamentals) have changed, modifications in terms of market capitalization might require some adjustments and so for the specific-sector investments. In the case that your portfolio had grown, you might want to have the gains as cash or reinvest, watching the initially suggested portfolio. If, on the contrary, the portfolio had lost value, accommodating the portfolio is always a good idea, understanding why the loss was made. 

However, it might be the case that you don’t want to have many investments, and you´d rather have only one investment vehicle that brings all these ideas together. In this case, there are ETFs and mutual funds that incorporate stocks from all over the world, according to your preferences. If you want to know the difference, check out my our investing 101 series

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About Author

Jorge Cardozo
Jorge Cardozo

Jorge has over eight years of experience in wealth management and economic research, managing more than 600 million USD. He has invested in all types of securities, ranging from traditional assets (fixed income securities and funds, global equity) to alternative assets (real estate, hedge funds, and private equity). Jorge holds an MBA from a top global program.

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