Foundation portfolio from scratch

Hi Folks,

I’m still fairly new to the game and looking for some guidance. I’ve just moved my pension over to a self invested pension, and I’ve got some decent savings too. All in all we’re talking in the region of $150k. I’m 38 years old, and keen to retire as early as possible, but without compromising lifestyle.

I’ve only dabbled around $15k in stocks that interest me so far (that are also Fool picks), but I’m really in the position where I need to build a diversified portfolio largely from scratch.

Can anyone provide any guidance as to where to go to look? Do I just look at the foundation stocks published on the Fools site? Do I just go back over all the most recent picks? I’m an amateur and I have a young family, so I’m really not in the position to study the financial reports of a large portfolio every quarter.

Many thanks in advance.

Banjomaker,

If you aren’t willing to learn how to do financial statement analysis --so you can make informed stock picks-- then these are your choices:

#1, Continuing buying your stock-picking advice from a firm such as TMF (not that there aren’t dozens of others with far better track records, such as Zacks, Value Line, Morningstar, etc.) and hope they don’t steer you wrong.

#2, Follow the free, stock-picking advice offered by brokers such as Schwab, E*trade, or Fidelity (all of which have better track records than TMF) and hope they don’t steer you wrong.

#3, Skip picking individual stocks, and just index your portfolio.

Arindam

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Most investors are best off to begin with mutual funds or etfs. An S&P 500 Index fund such as Vanguard’s 500 Index Fund (ticker VFINX) or SPY or a total market fund such as VTI are good ones.

As your resources grow and as you gain experience, many would add an international fund, a growth fund, a hot sector fund, sometimes a bond fund. Then gradually add individual stocks as you become aware of good opportunities.

While you are learning, try a CAPs portfolio where you can test your skill at stock picking without losing cash. TMF rates your portfolio’s performance vs the S&P 500 every day once you pick seven stocks. A positive score indicates you are beating the S&P. Once you learn to beat the S&P 500, you can easily convert to cash investments. Until then you are best off to use mutual funds and let the pros do the stock picking.

Hi, Banjomaker.

I am guessing you joined the Stock Advisor premium service.

Tom Gardner has encouraged Fools to own 10-20+ stocks, hold them all for 5+ years and expect 40% of them will lose to the market. Just 10-25% of remaining positions will drive 90-100% of the returns. That last point is why it’s essential to diversify, because there is no way of knowing in advance which companies will do what.

If you are a member of one of the premium subscription services, I would focus on the Best Buy Now opportunities which are also Starter Stock companies, followed by the remaining Best Buy Now opportunities, then the remaining Starter Stock companies. Your Analyst Team thinks the active recommendations are good long term, buy-and-hold opportunities, so the current market price isn’t as important as how long you hold the position.

One trap many fools fall into is thinking too much about how many shares they own and not enough about the value of those shares. They think they are somehow doing better buying a lot of shares of cheaply priced stocks rather than just a few shares of more expensive companies.

But the market price of a share of stock is completely dependent on the total market value of the company divided by the number of outstanding shares. The higher the market value, the higher the stock price. The more outstanding shares, the lower the stock price. However, neither market value nor the size of the shareholder pool is a measure of business performance of the company.

Regardless of whether you own 1000 shares at $1 per share, 100 shares at $10 per share, 10 shares at $100 per share or 1 share at $1000 per share, you still own $1000 of that company, and if the share price goes up 10%, you’ve gained $100 any way you split it. If there’s a company in which you would really like to invest but is too expensive for your available cash, just wait until you can save enough for a share.

Another unofficial rule many Fools follow is buying in thirds. Let’s say you want to purchase about $1000 of a company. You would buy $350 now, then another $350 on a future dip in price, again the final $350 down the road when the price is again at a discount. This is a form of dollar cost averaging which can even out your cost basis. Not relevant if your investing through a tax-advantaged account, but important if you are watching your potential capital gains and losses.

Many Fools watch their portfolios daily, hanging on each climb or drop in stock price and wondering what each piece of news means to the market. I like to say invest in companies, not markets. So instead of dwelling on quarterly earnings numbers, focus on how and what management says is happening with the business. When there’s a big drop in the stock price, ask yourself whether there was any significant change in the company’s operations that triggered or resulted from the market’s actions. If not, it may be a buying opportunity.

Foolish philosophy emphasizes long term investing of companies rather than short term trading of stocks. Focus on the company’s performance, not the market’s performance.

Another trap Fools try to avoid is investing emotionally in reaction to significant news or large price swings. Fools try to never make investing decisions out of fear or panic, or unfounded optimism and irrational hope. It’s not that Fools embrace risk but that we try to manage it through research and rational decision making. It is said that fools rush in, but Fools invest with purpose.

I’ll reemphasize the 10th Step to Investing Foolishly about selling too soon:

https://www.fool.com/how-to-invest/thirteen-steps/step-10-do…

And of course, there is the Foolish community, the greatest part of The Motley Fool. There are discussion boards on every facet of your money and your life as well.

https://discussion.fool.com

Your premium service with a terrific set of Community Boards for discussions of the coverage of recommendations. Just click on the Community tab of your service’s landing page.

There are also Premium Boards for each recommended company to which members of all premium services have access. This is a great place to discuss the companies themselves (though not the recommendations of them) with your fellow premium Fools:

https://discussion.fool.com/4056/premium-boards-10160.aspx

When you Favorite a board (click on the heart), it gets added to your Favorite Boards list, which you can find here:

https://www.fool.com/premium/boards/

If you follow the company on your Scorecard or Watchlist, you will receive a daily email notification of any RB coverage articles for the company.

The motto of The Motley Fool is to Educate, Amuse and Enrich. You’ll notice that enriching comes last and education comes first. And bridging the gap is amusement. So take advantage of the resources TMF has to offer to learn about investing as you build wealth for the future, and have fun during the process.

Fuskie
Who thinks the most important thing is for you to get started and to ask lots of questions, because that is how you learn and grow as an investor…


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