Random Thoughts on Portfolio Building Strategies

Random Thoughts on Portfolio Building Strategies

I think most people would want to retire comfortably. Pay off their mortgage. Build up their 401K or IRA. And take care of their essential monthly expenses while still having enough to travel and enjoy culture, fine dining, etc.

For most of us we need to save our money at the very least. And at the most, maximize our retirement plans. Investing in stocks and bonds and mutual funds is a great way to build up a portfolio. But one has to live within their means, don’t overspend on things, manage a monthly budget, in order to save each month.

Building the Portfolio

When it comes to stocks, a clear strategy is essential. For me, I try to ensure that a stock portfolio has 5 essential winning stocks. Thankfully, I have winners in SHOP, ZM, TSLA, AAPL, ISRG and TDOC. Well, this counts as 6, but these are all stocks that are currently over 100% profit gain right now. The remainder of the portfolio are riskier investments but most are profitable. But the idea is to have 5 strong contenders. And you can play around, buy and sell the rest.

Also, I need to make sure I have dividend paying stocks, in which I get a nice quarterly dividend for holding the stocks. I’m personally not at that point where I can live off of my dividends alone, but that is a goal of mine in about 5 years time. And add more shares of dividend stocks, which in turn can generate more money to buy more growth and momentum stocks when needed.

DRIPs (dividend re-investment program) is a great way to turn dividends earning each quarter into the purchase of more stocks. This is a true way to accumulate wealth in the long run and compound your money, by letting your brokerage firm take your dividends and re-invest in more dividend stocks… of course, the more shares you accumulate, the more dividends are earned, and thus this compounds greatly.

Cash Drag vs Available Capital to Invest

These days and especially in 2020, when the stock market is highly volatile, it’s best to have the funds on hand to buy stocks are bargain prices when the stocks tumble. Yes, investors panick and sell when there is a market crash, but at the same time these are great opportunities to buy up stocks when they are low. Historically, if a publicly-traded company has sound financials, these stocks will go up. It is inevitable if you study the history of the stock market.

The rules of cash drag are that you shouldn’t have too much cash on hand, as this money could be better utilized to own stocks that would potential go up in price. Too much cash means your portfolio isn’t being used to its full potential.

On the other hand, having 30 to 50% cash allows you to buy stocks when they are down when the time is right. If you are all invested in stocks, you won’t have the funds to buy more stocks if the opportunity presents itself… but yes, having dividend stocks would earn money as well, regardless how the market trends. Keep in mind that some companies stop offering dividends, while others will raise their dividend. It’s always good to keep up with the dividend stocks you own.

Another opportunity for having more cash on hand is when you are intraday and swing trading. You need a certain amount of funds available to day trade, and in fact brokerage firms require you to have a portfolio balance of 25k when starting day trading. And keep in mind that when you buy and sell a stock, it takes 2-3 business days for the funds to settle. To try and buy and sell more stocks before funds settle is called a freeride, and you could be penalized for that. So, you should always have the funds available when trading in the short term.

More later…

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randomguru

Portfolio Manager & Musician

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