The definition of a 'top share' varies among those interested in investing on the ASX.
Some believe top shares are those trading at low valuations with plenty of future prospects. Others could hunt for top shares in nooks and crannies, searching for companies operating in an in-demand corner of the market with little competition.
For every definition of a top share, there's likely an ASX stock that embodies it. And with the All Ordinaries Index (ASX: XAO) having slumped 13% in 2022, there are plenty of top ASX shares trading at bargain prices right now. Here's how I would find them.
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How I'd craft a portfolio of top ASX shares in 2022
Step 1: What makes an ASX top share?
Possibly the most common definition of a top ASX share is one that offers competitive advantages.
In that case, the dream could be to find a listed company that can corner a market where its offerings are in demand. A company in such a position will likely have little trouble growing its margins faster than its competitors. A loyal, returning customer base could also indicate that a company has a competitive advantage over its peers.
Others might argue that a top ASX share is one that can boast plenty of cash flow and a strong balance sheet, thereby increasing its chances of sailing through tough times.
Finally, a top stock might be one that's trading at a low valuation due to no fault of its own. They might also be dubbed 'diamonds in the rough', having been beaten down by shifting market sentiment or sell-offs despite offering underlying value.
It could also be argued that the criteria for a top share has shifted slightly in 2022 to one that's either shielded or benefits from inflation and rising interest rates.
Step 2: Building a portfolio
Once I found a few top shares on the ASX, I would get to work building a portfolio. Though, that might be easier said than done.
Of course, I'm a huge fan of diversification, even when investing in top-shelf stocks.
A portfolio that covers numerous stocks in numerous sectors will generally offer the best protection from market shifts. Therefore, I will always encourage those shopping for ASX shares to build a diverse portfolio.
Additionally, as Warren Buffett advises, investors would be wise to understand all the ins and outs of a business and its industry before investing in it.
Thus, those building a portfolio of top shares could find themselves spending a lot of time researching.
Step 3: The power of time
Finally, once I'd built my portfolio of top ASX shares – hopefully taking advantage of market volatility to do so – I'd sit back and trust my picks.
That's not to say I'd set and forget. I would still seek to be informed about my holdings.
However, good things come with time. More often than not, top shares will reward investors over years and decades, not weeks and months.
Taking this approach could also help to ward off the anxiety that so often accompanies short-term downfalls.
