How I Construct My Portfolio

If you got your value investing strategy already in place, you should also think about portfolio management. So which means, you would need to construct your portfolio, keeping in mind the different good and bad things that can happen. Which means, you should also account for diversification.

What is diversification?

Basically, its buying different stocks from different industries so that your whole portfolio is not affected much when one industry falls.

I am not a fan of too much diversification. I would like to own just a few stocks. The largest I have was 10. And I think that is too much diversification already. I currently hold 4 stocks and I feel comfortable with it. With majority of my net worth tied into these 4 stocks.

The thing about diversification is sometimes its already built into a company and you don’t have to diversify anymore. Take for example the big conglomerate Ayala Corp. If you bought Ayala, you could have maximize you profit in the company by betting majority of your money. Even if you own just the Ayala stock, buying other stock in power, utilities, telecom, real estate, banking, retail etc is somewhat redundant. They already have those companies. So in a way, Ayala Corp does provide the diversification you need.

(Disclaimer: I don’t own Ayala Corp stock)

How to Slice the Pie?

Managing how much money to put into an investment is paramount. I would slice the portfolio pie into 4 pieces. The first piece is for the income. So 25% of the portfolio should be high dividend, income generating investments. Another 25% for growth stocks, these are companies that are growing 18% or more year after year. Its hard to find these kinds of investments, so sometimes its not filled immediately. Another 25% for opportunistic bets, these are stocks that suffered battered stock price because of bad news, that’s probably unwarranted. Again, these are hard to come by and would depend on patience and a lot of waiting. The last 25% for placeholder money. These are stocks that will return better than a savings bank or money market. Some sort of a placeholder for cash. Gives decent dividends too. To take advantage of opportunities that will come.

  • 25% Income
  • 25% Growth
  • 25% Opportunistic
  • 25% Reserves

I only have a small fund to manage. So I tend to lean towards more income generating investment as of now. This is because I want to make sure that when really really bad things happen to a stock or the economy, I would have the cashflow to take advantage of these opportunities. When my fund grows, I will lower the percentage for income to compound the money faster by going after growth and opportunistic bets.

How I Bet?

The 25/25/25/25 partition in the portfolio is the ideal portfolio for me. But sometimes it doesn’t go as planned. Sometimes, I am so sure of some bets, that I bet more than 40% of that portfolio. What if I’m wrong? Well, if I’m wrong and company went to 0. The next strategy would be to write my resume and find a job. 🙂

It never happened to me yet. Only when I am very certain that the investment is a good investment shall I risk 40%. I am not saying this is the best way for all value investors to handle their money. This is just what works for me and comfortable doing.

Leave a Reply

Your email address will not be published. Required fields are marked *