So, you're ready to build an ASX stock portfolio?
Or maybe you already have one, but it's looking a tad messy. Perhaps it's a bit lopsided, with a lot of money in one or two stocks and smaller amounts in others, and you're wondering if that's a problem.
Well, private client advisor Ken Howard from Morgans has some advice for us on how to construct a good portfolio, including how much money we should invest in each ASX stock.
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How many ASX stocks should you have in your portfolio?
In a recent article, Howard discussed the importance of a diversified shares portfolio.
Holding ASX stocks from different sectors tends to smooth out your returns because the sectors that do well will offset those that don't over any given time period.
Geographic diversification is handy too. For example, in FY24, US shares delivered almost triple the capital growth of ASX stocks. So having a bit of money in both markets would have been a good idea.
But how many stocks are ideal in any one portfolio?
As we recently reported, the answer to that question is very subjective. The Fool team recommends 15 to 25 stocks per portfolio as a general guide.
The next question is, how much money do you put into each ASX stock within your portfolio?
This refers to a stock's 'weighting' in your portfolio.
A good rule of thumb for stock weightings
Howard recommends giving each stock in your portfolio a 3% to 7% weighting. That means investing 3% to 7% of your capital into each stock.
He explains why good diversification and carefully considered stock weightings are important:
As a rule of thumb each holding should be between 3% and 7% of the portfolio.
Too many small holdings are hard to follow, and large holdings can have too much influence over a portfolio's returns and strategy.
Let's put this rule of thumb into practice.
Say you have $10,000 in capital to build your stock portfolio. An ASX stock with a 3% weighting would have $300 invested. One with a 7% rating would have $700 invested.
Over time, as share prices change, the weighting of each ASX stock in your portfolio will also change. So, that's something you need to monitor if you want to maintain Howard's 3% to 7% rule of thumb.
For example, say you invested $700 — or 7% of your $10,000 capital, into an ASX stock that doubles in value over two years. And over that period, your whole portfolio gains 15%, so it's now worth $11,500.
That stock is worth $1,400 today because its share price has doubled. Your portfolio overall is worth $11,500, which means that stock now has a 12% weighting.
Howard reckons that's too high for an individual stock.
If you agree, you might want to sell some of that stock or add fresh funds to your portfolio to reduce its weighting.
Perhaps you could use those additional funds to start a new position in another ASX stock, or average-in on a stock you already hold that has fallen in price.
It's up to you how you rebalance your portfolio.
Howard comments:
A buoyant market can be the opportunity I need to trim large holdings in mature businesses, although I will be more patient with businesses delivering strong growth.
