Is the stock market taking a leaf out of the books of retailers and having an ‘End of Financial Year Sale’? If so where are all the big red “SALE” signs floating around the ASX website? It may sound like a joke with market volatility at its highest in recent times, however this is a good time to review current holdings and to possibly add more.
There is no better time to view the strength of your portfolio than in this current market. Have you got the right diversification? Is your portfolio too top heavy? Or have you just been waiting for the right time to buy? Nearly every portfolio will have received some losses in the recent market volatility, but the difference between an actual loss received to the potential loss over two different portfolios will depend on how well it has been built, starting from the bottom up.
A portfolio should look similar to that of the food pyramid we all saw as kids. The base, your core stocks, should house the bulk of your investment. These are your dependable companies. They will generate income and grow however normally not as fast as others — companies such as Woolworths (ASX: WOW), currently 6% off. QBE Insurance Group (ASX: QBE), another possible choice, is on sale at 3% off. How about one of the big four banks like National Australia Bank (ASX: NAB), currently 9% off?
The next block in your investment pyramid should be growth companies. They should comprise approximately a third of your investment. These companies are the ones that have a bright future and will grow and grow. Companies to consider here might be Collection House (ASX: CLH), selling at a reduced price of 5% off, or Telstra (ASX: TLS), selling at 8% off. Both offer a good outlook on future growth and also provide a generous income.
The final stage is the speculative block, these companies are a gamble and should only be a small value of your investment portfolio. They are the maybe of the future and require great research prior to purchasing. This building block should only be added once the previous two blocks are complete and solid.
Creating an investment portfolio can take some time, a large amount of research and patience. These steps are needed to ensure that your investment is as safe as possible in times of a volatile market and don’t cause too much pain. Diversification is a must, and the old saying of “don’t put all your eggs in the one basket” rings true. Having solid core companies will help keep your investment on the upward track. Good growth companies will turn any modest investment amount into an impressive return. Speculative companies aren’t for everyone, they are a gamble. Remember, only 12 months ago the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) was balancing around 4,000 points, currently it’s at 4,680 points, even after the falls of the last month.
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Motley Fool contributor Roberto Galeano owns shares in Woolworths and Collection House.