Although they are great businesses, Fortescue Metals Group Limited (ASX: FMG) shares and Rio Tinto Limited (ASX: RIO) shares wouldn't be in my hypothetical $10,000 share portfolio.
A $10,000 portfolio
Some of my fellow Motley Fool contributors have identified the ASX shares they would buy if they had a small — but impressive — share portfolio of $5,000, $20,000 or even $50,000.
I figured I would do it differently and identify a few shares I wouldn't buy.
Here's why I wouldn't buy Fortescue or Rio Tinto shares.
Circle of competence. I don't know much about mining, let's be honest. I've never been to a mine or travelled to a Chinese port or even India. That's where most of their product is shipped. Therefore, I believe that I have no advantage over other investors who have experience in the industry. In other words, it's outside my circle of competence or 'not in my wheelhouse'. Ultimately, with over 2,000 other shares on the ASX and more than 10,000 internationally, I'll happily stay inside my circle of competence and find companies I can understand.
Commodity risk. I couldn't tell you — with any accuracy — where the price of iron ore or any other commodity will be in a week, let alone five years. Without knowing the expected price of these companies' number-one product, I find it hard to value them. Every company has some form of pricing risk (e.g. a pizza shop cannot predict the price of ham) but Fortescue and Rio Tinto's profits depend on selling into free markets with no product differentiation.
What to buy instead
Instead of buying the usual names like Rio Tinto, BHP Billiton Limited (ASX: BHP) and Fortescue; if I were starting a share portfolio today I would focus on the businesses that I know well. From there, I'd ask myself: will this company be around in 10 years? If I couldn't answer that question, those shares would not be included in my portfolio.
Foolish Takeaway
If I knew someone who was starting from scratch, the one thing I would tell them is this: don't rush. Take your time, paper trade (or play the ASX's free share market game) and get to know investing before committing a small amount of money to a business that you know and trust for its quality.
