There are different types of strategies that investors can apply to their share portfolio. These are the 5 most common:
This strategy is appropriate for investors with varying risk profiles, where the levels of growth can be adjusted to the individual. Stocks selected for this portfolio often have a high beta. This means that they move more than the market. These types of stocks can generate a higher return than the market but can also generate a higher loss than the market. High growth stocks tend to be smaller companies that in the early stages of investment which give them potential to significantly grow. Larger companies are more stable but may not grow as much and hence do not offer the same share appreciation potential. In this type of portfolio however, the aim is to grow the value of the portfolio through capital appreciation.
Some investors may want to generate income from their portfolio to fund their living. They may select stocks which pay good dividends to create an income stream. Companies which pay good income tend be larger companies that have been operating for a while and can pay out large dividends to investors. This is because they do not need to reinvest company funds to expand the business. As income generating stocks tend to be big, stable companies, these income investors sacrifice capital growth for income. Investors in this portfolio strategy tend to be low risk takers. However, there is often the risk that the capital actually depreciates over time, which is a key risk for income investors to consider.
Value investors like to select stocks that are priced under the intrinsic value of the stock. These investors use fundamental ratios to identify mispriced stocks and hold these stocks long term. They believe that the collective wisdom of the market is incorrect and it is not pricing a company at the correct level, and it is only a matter of time until the market realises this and starts to bid up the share price. This strategy is suitable to investors with a low risk profile as companies which are selected in this portfolio are usually fundamentally sound with strong balance sheets. This risk with this strategy is that the investor may be incorrect in thinking that they are right and the market is wrong, and/or the market never takes a positive view of the company and therefore no share price appreciation will occur.
A balanced portfolio has a mixture of growth investments as well as defensive assets. It is suitable for investors with moderate risk profiles who want to take some risk but not too much. In this portfolio, investors can gain exposure to some high stocks but also have the safety of holding defensive stocks as well.
Stocks selected for this portfolio are stable and safe. These stocks are companies which consumers will need regardless of economic environment. This could be stocks in the consumer staples sectors such as groceries stores where goods sold in that company have demand all the time. Investors with low-risk profiles would be suitable for strategy. Stocks in the defensive sector have lower risk but they also have lower returns than higher risk stocks. The risk here, similarly to the income portfolio, is that the capital may depreciate over time, or the reward is not worth the risk of being in the share market. To paraphrase George Washington, sometimes the best defence is a good offense.
Lauren Hua is a private client adviser at Fairmont Equities.
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