How to Build a Stock Portfolio That Works - Investment U

by Alexander Green, Investment U Chief Investment Strategist
Friday, August 10, 2012: Issue #1834

Do you have a tendency to sell stocks when the market is down only to buy them again when it recovers? If so, you?re probably a frustrated investor? and definitely not alone.

It?s hard to stay calm when a lifetime of savings is at stake. (After all, this is real money we?re talking about.) But one way to overcome emotional and counterproductive tendencies is to build a personal stock portfolio. Here?s what I mean?

Many years ago, in an earlier life as a stockbroker, I had a particular client who found it impossible to overcome his worst instincts. Whenever the market had a sudden downdraft, he?d run to cash, abandoning his investment discipline. Then when the clouds cleared and the market rose again, he?d resume the confidence to invest again.

As you might surmise, this had disastrous consequences as he was forever buying high and selling low. After trying unsuccessfully to calm his fears, I finally hit upon a solution that allowed him to ride through the tough patches in the market with relative equanimity: a personal stock portfolio.

?What kind of car do you drive?? I asked when he inquired about the market again.

?A Toyota (NYSE: TM),? he said.

?Ok, we?re going to buy a few shares of that,? I said. ?What kind of computer do you own??

?A Mac.?

All right, we?ll pick up some Apple (Nasdaq: AAPL).

?Who is your local utility??

?Dominion Resources (NYSE: D).?

?Check. We?ll buy some of that.?

?Who?s your favorite retailer??

?I don?t have one,? he said. ?But I can tell you my wife?s is T.J. Maxx (NYSE: TJX).

?We?re going to buy some of that, too.?

Before long, we put together a blue-chip portfolio made up not just of his automaker, local utility, computer company and clothing retailer, but the businesses that provided him with financial services, telecommunications, prescription drugs and hospital services. All in all, there were 25 stocks in the portfolio.

It didn?t take long before we got a chance to put this new strategy to the test. When the market started to keel a few months later, he was on the phone.

?Things aren?t looking so good,? he said in that familiar tone of fear and dread. ?I?d feel a lot more comfortable sitting on the sidelines right now.?

?Hold on,? I said. ?Are you still sending in that car payment every month??

?Yeah.?

?Are you still paying your power bill??

?Of course.?

?Is your wife still shopping at TJ Maxx??

?Regrettably, yes.?

?Well if you?re still patronizing these businesses, chances are the other customers are, too. Why would you sell your shares now when they?re so cheap??

He thought about this and said he?d have to call me back. But you know what? He didn?t. Not for several weeks.

When we did finally did talk again he admitted that he had gotten over his jitters by remembering that these were real businesses ? ones he was patronizing ? not just stock quotes or paper certificates. Putting together a personal portfolio turned out to be his salvation.

How about you? Are you sending a check to Duke Energy (NYSE: DUK) every month, carrying a Visa (NYSE: V) card or shopping on Amazon (Nasdaq: AMZN)? Take a look at how these stocks have performed through the recent financial crisis and weep. They could have been part of your personal portfolio.

This approach isn?t without its drawbacks, of course. No strategy is. For instance, you may bank with Citigroup (NYSE: C) or use a Blackberry (made by rapidly failing Research In Motion (Nasdaq: RIMM), in which case you would have had a few stumbles ? minimized by using a trailing stop).

Still, if all else fails, a broadly diversified selection of great companies you actually patronize may give you the wherewithal to respond unemotionally to market volatility rather than cutting and running at the first hint of danger.

If emotions have plagued your own stock market approach, maybe it?s time to consider a personal portfolio.

Good Investing,

Alex

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Topics: how to build wealth, Nasdaq: AAPL, Nasdaq: AMZN, Nasdaq: RIMM, NYSE: C, NYSE: D, NYSE: DUK, NYSE: TJX, NYSE: TM, NYSE: V, stock portfolio advice, stock portfolio management

Source: http://www.investmentu.com/2012/August/how-to-build-a-stock-portfolio.html

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