Identifying the right stocks for your portfolio can seem like a daunting task. With more than 1500 companies on the Australian Stock Exchange (ASX), how do you know which stocks to choose? Rescu. asked finance expert Dale Gillham for his guidance.
All too often, people feel like the job of choosing shares is too big and that it will take up too much of their time, which explains why many investors are happy to hand over control of their investments to others. But this needn’t be the case.
Contrary to popular belief, if you invest in the larger companies and take a low-risk, methodical approach to investing over the long term, then nine times out of ten you will achieve far higher returns than if you try to pick the next boom stock. Remember – it is not how much you make on any one investment that makes you wealthy, it is how much you do not lose over time.
The list of stocks you select for your portfolio will depend on the time you have available, your resources and the goal of your portfolio. That said, I recommend most investors don’t stray too far outside the top 100 stocks on the Australian market for the following reasons:
- The stocks are highly liquid. In other words, there is a lot of buying and selling taking place in these stocks every day.
- Stocks from the top 100 are generally profitable businesses with some of the best managers in Australia, providing stability in the growth of the company and the share price.
- They generally pay good dividend yields with good tax credits attached. A dividend yield is the dividend shown as a percentage of the last sale price of the shares.
- Reliable information about these stocks is much easier to obtain.
- The chances of any one of these companies going broke is very small.
- These stocks will produce good returns over a 10-year period.
- Venturing outside the top 100 stocks will not only increase your risk level, but the knowledge you require to successfully manage the risk will be greater.
For newcomers, I suggest sticking to the top 20 companies, and when you get a little more experience, start looking outside of that.
Above all, buy quality shares, as a common misconception for newcomers to the share market is that buying cheap stocks is the best method for achieving higher returns. This belief will not only cost you money, it will hinder your ability to generate profits because you are investing your faith in speculative stocks. In other words, you are speculating that a cheap stock will perform better that a solid ‘blue-chip’ stock.
In my next article, I will go a little deeper into selecting shares for your portfolio, as well as showing you how to manage the risk.
Dale Gillham is the director and founder of Wealth Within, an Australian-based company specialising in share market education and independent investment advice.
Dale is the author of the book ‘How to Beat the Managed Funds by 20% and Australia’s first and only accredited Diploma of Share Trading and Investment. For information visit www.wealthwithin.com.au
