How to: build a share Portfolio That Stands the test of time

The stock market is an interesting place.

One man’s trash is another man’s treasure – what someone sells, another buys – creating demand and supply – fuelling capitalism in its wake, sometimes without regard for ethics or ethos.

But it is also the arena where Davids of the world get a fighting chance to stand against the Goliaths and win. The place where victory isn’t just guaranteed to those with mighty resources but for those who are committed to the act of winning.

Winning, in this context, means more than just multiplying money. It refers to the process of increasing the odds in your favour.

This article doesn’t share quick tips to beat the stock market – but it does aim to highlight fundamental principles one must understand and employ so chances of success can increase – even if it is ever so slightly.

are you Optimising for Capital Gain or profit or both?

If you’re new to investing and the stock market, one of the first few things you must clarify for yourself is whether you’re a trader or an investor?

Too many portfolios have hemorrhaged money because markets have been in turmoil, causing investors to act like traders and sell before the time is right.

What then, differentiates a trader from an investor?

A trader tracks the fluctuations in the price of a share or a commodity with the aim to buy low and sell high. This allows him/her to cash in on the difference in the price for which the share / commodity was purchased and sold, thereby making a gain or loss on the trade.

An investor performs that exact transaction, except on a longer timeline – often months and years – which offers him the luxury of stepping away from daily market movements – that spell doom for those who are emotionally tied to their investments.

When you know who you are – trader or investor – you are empowered to build discipline into your buying and selling decisions – which helps you weather daily price fluctuations.

Time in the Market beats timing the market

John C. Bogle – founder of The Vanguard Group and the creator of the first index mutual fund said, “Time is your friend; impulse is your enemy.”

For those who enter the markets without a robust strategy, jumping on trends or attempting to pick winners becomes a lazy substitute – one that results in a declining bank balance and increasing heartache.

Even the best traders lose when they try to time the market.

Instead, a calculated approach to keep capital invested over a long time period can allow the money to appreciate. There are various factors that determine appreciation and this is not a sure fire way to secure a win – but for most people, this can become a way to generate consistent returns.

Investing is inherently risky – no approach guarantees a successful outcome from the onset – but by being disciplined about the strategy and its execution, one can mitigate some of that risk.

Are you risk averse, risk neutral or a risk seeker?

If you invest – either as a trader or as an investor – you are taking a risk. How well you tolerate the level of risk you’ve taken – is another question to answer.

Unfortunately, what makes answering this question accurately; slightly difficult, is that risk tolerance depends on external circumstances like your financial situation as much as it does on your inherent personality.

Because tolerating risk is a behavioural trait more than a financial one, people can and do tend to adjust their level of risk tolerance as they move through various phases of life.

Very generally, those who are in their 20s and 30s tend to have a higher appetite for risk whereas those in their 40s and 50s tend to be more risk averse.

While there are various questionnaires and tools available online that can help you arrive at some concrete estimate of how well you tolerate risk, a more wholesome approach might be to reflect on some big decisions you’ve taken in life that may have had an element of risk built into it.

• Did you move cities to for your education or a work opportunity?
• Did you leave an established career to pursue a passion?

Answering such questions can be indicative of your inherent leanings as far as risk is concerned. Not many people like moving cities and not a whole lot have the courage to leave an established source of money in exchange for uncertainty and hustle. That’s saying something if you’ve found yourself in the camp that’s actually made those moves.

take the last call on financial decisions

No one cares about your money as much as you do.

Financial planners who work in this space may seem more qualified to give you advice, but that advice is rarely unbiased.

People advising you are doing so because they get paid for it. If you do end up using the advice, just be mindful to note that there maybe incentives for professionals to recommend certain investments that may or may not align with your personal wealth creation goals.

As with most things in adult life, the last call on how you spend your money should lie with you. Make informed decisions that are based on facts rather than emotion. Another recommendation is to find ways to incorporate financial literacy into daily life – this is the key that can unlock a life of stability and security for you and your family.