Building a winning portfolio is a lot harder than it might seem. Not only does it require you to pick the right stocks, you must also diversify between industries as well as companies both big and small. Believe me when I say an improper balance can be extremely damaging to your long-term wealth.
An effective way of looking at your portfolio is to visualise it as a pyramid. First of all, you need solid foundations on which to base the rest of your structure. This section is to be made up of strong, well established companies that could survive through even the toughest economic conditions. It is also ideal if they offer a decent dividend yield.
Laying the foundations
With the S&P/ASX 200 (INDEXASX: XJO) trading near a six-year high, it has become increasingly difficult to identify attractively priced blue chip stocks and I certainly wouldn't be touching any of the big four banks or the supermarket duopoly right now. Instead, companies like Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), Westfield Corp (ASX: WFD) and Amcor Limited (ASX: AMC) present as strong candidates. Each are strong enough to support your portfolio and offer attractive dividends.
Build from the ground up
Once a solid foundation has been laid, it's time to start building from the ground up. This is where it gets much more exciting… While these stocks might not offer the same level of safety as the core stocks mentioned above, they have the potential to grow earnings at a much quicker rate, therefore improving your chances of superior returns.
To reap the greatest gains, investors should look for small-to-mid-sized companies that offer products or services that could prove incredibly useful in the years ahead. Companies like Carsales.Com Ltd (ASX: CRZ), Greencross Limited (ASX: GXL) and Veda Group Ltd (ASX: VED) are all growing at impressive rates and I expect each of them to be larger in the coming years than they are today.
The finishing touch
It should be noted that these growth stocks can also be used to build the very tip of your pyramid. This is a good option for investors who carry a low tolerance for risk, however, investors willing to accept a little extra risk in the hope of recognising massive returns can consider taking what would be considered more of a 'gamble'.
Being the tip of the portfolio, it's clear that only a small amount of capital should be designated to these stocks – more often than not, they're extremely volatile and could just as easily fall in price as they could rise. A perfect stock to consider would be small-cap biotechnology/healthcare company ADMEDUS FPO (ASX: AHZ). Its shares are currently trading at just 15 cents while they have gained an impressive 60% over the last 12 months.
