5 Ways Australians Can Build a Balanced Stock Portfolio

Last Updated on 07/07/2016

All investors want to achieve success and make a quick and sizeable profit on the stock market, but this is easier said than done. If trading stocks was an easy and guaranteed way to earn cash then everybody would be making a fortune off the markets and all swanning off into early retirement happy – but the reality is that it takes knowledge and skill to become a successful trader.

One way to improve your chances of success in the market in Australia, is to adopt a balanced approach to your stocks, and to develop the sort of versatile and robust portfolio which can weather any storm that the domestic and global markets can throw its way. Read on for our five top tips for success:

Know Your Risk Tolerance

To begin with, a potential investor needs to know his or her investment strategy. How much capital can you invest? What sort of growth would you class as a successful ROI? What are your current and future capital needs? Are you the sort of person who relishes the rollercoaster ride of risk taking, or do you prefer to play it safe? These are the sort of questions for which you need to have definitive answers, as you establish your risk tolerance.

This will provide the framework you need as you build your portfolio, enabling you to assess your progress and it will give you a platform from which to plan your next moves.

Select Diverse Sectors

For a ‘balanced stock portfolio’ read ‘diverse.’ Wise investors expose themselves to as many potential growth factors as possible, while also hedging their bets against potential slumps.

Diversifying your portfolio across different industries safeguards your investments should one or more industries suffer a downturn, giving you some much needed peace of mind as you work to bolster your return. Remember, a stock portfolio always contains an element of risk, but it is the savvy investor who works to minimise these risks.

Look at Company Characteristics

The stock market is not simply divided into strong performers and weak performers. If it were, success would be simple. Instead, different companies behave in different ways. Some organisations can perform well in seemingly slow industries, while others may adopt a more conservative strategy despite operating in a booming sector.

Companies may even rally strongly after being dealt a seemingly catastrophic death blow in the market. Investors in Australia needs to stay abreast of the different characteristics displayed by different companies. This can be achieved by tuning in to the news and analysis offered by market expert publications and outlets, such as CMC Markets and eSignal.

Don’t Discount the Old Faithfuls

Even if you assessed your risk tolerance and decided that you can handle the trials and tribulations of a high-risk, high-reward portfolio, there is always room in your roster for traditionally slow and steady stocks.

You’re not going to see any fireworks from these guys, but neither are you going to see any calamitous downturns. Offsetting the potential gains and slumps of your riskier big-hitters is a wise move as you seek to create a sustainable portfolio which will deliver you returns over time.

Find the Sweet Spot Between 5 and 10

Unless you are already an experienced investor, it is wise not to go too far too soon. You will need to have a sufficient number of stocks to provide a safety net against potential falls – as well as the latent gains necessary to make it worth your while – but it is important not to overreach.

A good rule of thumb is to aim for a portfolio of between five and ten stocks. This affords you the scope required to achieve a balanced situation, as well as a launch pad for future strategies as your position changes, while still maintaining a manageable selection of stocks.