Investors use many different approaches to building their portfolios. Some experienced investors are prepared to put all their eggs in one basket — a small number of carefully selected stocks — and watch the basket. This approach requires a very high level of understanding of each investment, an accurate assessment of the value of each investment and a keen eye to minimise risk.
Another approach involves buying small stakes in a large number of companies. At first glance this would sound like a very defensive and low risk strategy — and in a way it is — however, to outperform the market while owning a large number of stocks requires an equally keen understanding and constant monitoring of a diverse universe of stocks and once again is perhaps best suited to keenly attentive investors.
Which leaves most investors' portfolios somewhere in the middle — owning enough stocks that they don't risk being too exposed to any one company or industry while also not being so diversified that individual stocks in the portfolio can't make a meaningful contribution towards outperformance.
One useful way to build a portfolio is to think in terms of investment themes that can provide a tailwind to your portfolio. Here are four themes to consider gaining exposure too and a company that arguably offers a sensible way to invest in the theme.
Theme 1: US housing
James Hardie (ASX: JHX) is a significant manufacturer of fiber cement products in the USA as well as in Australia, New Zealand and the Philippines. Its leverage to an improving construction market, particularly in the USA but also in Australia and NZ, offers shareholders good exposure to this cycle, which would appear to still be in its early stages.
Theme 2: Financial services
Suncorp (ASX: SEK) is well placed to continue to grow its earnings from insurance, banking and superannuation particularly in its key Queensland market. With the 'bad bank' issues now resolved, the stock looks to be one of the cheaper ways for investors to gain exposure to the continued demand for financial services with one leading broker suggesting the company is trading on a forecast 12.5 times 2015 earnings.
Theme 3: Online
Job advertising website SEEK (ASX: SEK) continues to be an outstandingly successful business. Seek's market leading position in both domestic and overseas employment advertising markets makes the outlook for Seek a good one. While at first glance the stock may look expensive, with earnings forecasts continuing to suggest double-digit growth rates, the high multiple would appear justified.
Theme 4: Energy
Origin Energy (ASX: ORG) has grown into a major integrated energy company. Despite some concerns around a declining domestic manufacturing industry, population growth coupled with the burgeoning potential for LNG export make Origin's market position and near-term project completions appealing assets for investors.
Foolish takeaway
Companies operating in industries with the 'wind at their backs' can generally find it easier to grow earnings than companies operating in an industry suffering from a headwind. While company specific factors must always be considered as well, a good theme can be one way to narrow down the selection of candidates for a portfolio.
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Motley Fool contributor Tim McArthur owns shares of Origin Energy.
