Are you looking to construct a solid portfolio of stocks?
Are you looking for best tips to make a model portfolio of stocks?
Are you looking to make a recession proof portfolio?
If your answer is “Yes” for above questions, then keep reading this article as we are starting a series of 5 Chapters on “How to Create a Model Portfolio” and this is the first article in this series
How to create a Model Portfolio (Chapter 1): Avoid Common Mistakes in Portfolio Building.
First thing first. In this first chapter of this series we will discuss most important thing required to make a model portfolio and that is “Common Mistakes” you need to avoid. What not to do is more important than what to do. So, in this article we will discuss all the common mistakes, which most of retail investors make in their investing career.
Now let’s discuss these mistakes one by one
#1 Buying 52 Week low stocks: Buying a stock just because it has corrected much is not a reason to buy any stock. Most retail investors look for 52 week low stocks and they buy it just because stock look cheap to them.
Without digging the reason why that stock has fallen so much, they buy it. There can be so many reasons why that stock has corrected so much for example
- Laggard in Industry
- Corporate Governance Issue
- High Debt
- High Share Pledging by Promoters
- No Future Growth Prospects
So, next time you find any stock trading at 52 weeks’ low before buying it just do some homework that why everybody is so bearish. Your research will help you to avoid this very first mistake of buying inferior stocks.
#2 Too many stocks in Portfolio: Most of retail investors buy 40 or 50 or even 100 stocks of different company in their portfolio with an impression that they are diversifying. We should not buy too many stocks.
We should go with a focused approach. There is no exact number for an ideal portfolio but it should be based on number of stocks one can properly track.
To give you an idea, ideal portfolio should have 8 to 12 stocks. If you have time and can monitor your stocks, then you can have 15 to 20 stocks but at max it should be less than 25 for a retail investor
#3 Tips & News based stocks: Most of the retail investor buy stocks on the basis of tips they get from their friend or neighbour or TV Expert.
They make that stock part of their portfolio, without knowing about the business of the company. If you don’t understand the business of any company and if you are not confident about any company’s business never buy that stock.
Because, if you buy just on the basis of tips, at the time of correction in that stock instead of adding more, you will get confused and regret about your decision why you bought this company’s stock which is going down and down from your buying levels
#4 Penny Stocks in portfolio: Attraction of Retail Investors towards Penny Stocks is one of the biggest reason of losing money in Stock Market. Buying Penny Stocks is like searching diamond in scrap.
One could be lucky to find any Multibagger Stock out of 10 penny stocks but those 9 will give you much bigger loss than the money you will make in that one lucky stock. It’s always better to buy a lottery ticket instead of buying penny stock.
#5 Too many stocks from same industry: Buying more than 2 stocks from same industry is not advisable for retail investors. If you have a portfolio of 15 stocks and in that portfolio you have 5 stocks from pharma, 5 from Auto and 5 from FMCG. You are exposing yourself to just 3 sectors. If one sector will face the heat all 5 stocks in that sector will underperform. This is not a proper diversification
#6 Lump-sum Investment at one shot in single stock: If you find a good company, start with a small amount and when correction comes, keep adding more.
#7 Buying Wonderful company at Expensive Price: If you buy wonderful company at expensive price, you will not make good money. So, it’s better to buy good company at reasonable price
#8 Don’t sell just for 10% to 15% profit: We love to call ourselves Investor, but whenever we find our stocks are up 10% to 15% or 20% from our buying price we sell them for that small profit. Remember, it’s a trading behaviour not good for investor as investor buy any stock not for mere 10% or 15% but for 100% or 200% or even 300% return
So, we have discussed all the common mistakes which most of the retail investors make during their portfolio building such as Buying Cheap and Inferior stocks just because they have fallen too much, Buying too many stocks, Tips based & News based buying, Too much focus on single industry, Buy lump-sum instead of phase-wise manner, etc. Hope this article will help you to avoid such mistakes in your investing journey. We will continue this 5 Chapter series of “How to Create a Model Portfolio” and bring more value to our readers with next chapter in this series