Thoughts / tips on creating a diversifed portoflio?

Hey all,

I'm looking to expand what i currently have in investments to have a more diversified approach. I'm sorry if there are already threads out there with this same concept, but for a bit of fun, can some people provide me with some input as the whether im in the right direction, or suggest some things etc..

So, hypothetically - I have $2000 upfront, and am going to contribute around $500-1000 per month into this portfolio, whether i buy more shares each month, or contribute to a MF, etc..

I was thinking over say, the first 6 months having a portfolio of companies such as:

BHP
Woolworths
NAB
Telstra (maybe?)

... Thats all i can come up with at the moment .. And 2-3 managed funds.

Just curios as to what some people may have done in the past, or.. what sectors i should be spreading across etc..

Thanks for your help.
/Alex

 

Buying indivudal shares will eat up transaction costs - considering the ASX is still in the 4500 range, and will move back up to and beyond the 7000 range over the next while, you could consider opening a Colonial First State online managed fund, Australian Geared share fund. This fund will provide diversification into the top 20-50 ASX shares for you - now is an excellent time, particularly with $2k and adding your $500 as dollar cost averaging.

ASX has outperformed all other global share market over the past 130 years.

Tim

 

I am in the process of taking out a margin loan. I have 6 stocks in mind. FIrst 3 stocks are definite. the other 3, i cant as i don't have enough equity as i am going to make sure my LVR is between 40-50%. i will be aiming first to get $10,000 each in the first 3 stocks, and then completely buy then so no leverage, and then look at getting the other 3. and then look at buying others if the prices are still decent. The first 3 stocks, I am going to keep these stocks for long term (+10years), and enter into Dividend Reinvestment Plans if the stocks provide it.

If i buy RIO in future, i could be tempted to sell if it skyrockets back up to to $150 or more, which i believe it will in the future.

DEFINITE
1. BHP
2. NAB
3. WOW

FUTURE (HIGHLY LIKELY)
4. RIO
5. WES
6. TLS


The reason i don't like managed funds, is because of the investment/management fees, etc, some also have exit fees etc. Though i know they are still a great way to invest, and lots of money can be made, it would be safer, since there is more diversity. BUT I wouldn't want to pay fees for the next 10 years since i am looking at long term investment. Just paying capital gains and brokerage seem better to me.

 

"..or.. what sectors i should be spreading across etc.."

William O’Neil's quote: “Diversification is a hedge for the ignorant”.
If you do not have a method/system to deal with one stock how are you going to successfully deal with any more than that?

 

I'm aware my original post must have seemed quite limited in the amount of thought i've put into this, but i am just curios at how some other people throughout this forum deals with these scenarios.

I actually do have a CFS geared share fund, worth around $10,000 at the moment.. So i will continue to contribute to that for several years to come.

It is a good point however in regards to the brokerage, and it is something i have considered. I wouldn't go and buy 10 lots of shares, all at $500 lots, only to pay $20 to buy and a further $20 sell (approx).

I did like the comment in regards to long term investing and the fees that come with MF and similar investments.. Perhaps i will look at investing in 2-3 MF for the time being, and putting money aside over the next 12-18 months until there is enough to make some individual purchases of shares with minimal brokerage.

I did read somewhere, never to spend more then 1% on brokerage.. Which is probably not a bad idea.

To buy say, $500 of XYZ company, trading at $1, and brokerage is $20 to buy and again to sell, that is equal to 8% of your initial investment being tied up in brokerage. So to profit 10% from the XYZ shares, your barely making a few dollars.. But to invest say, $3000 or so, with brokerage equal to 0.6-7% probably isnt to bad.

But im sure you all knew that anyway

As for some MF to suggest.. Im quite interested in BT, ive heard alot of good things about them and have a meeting with an advisor for BT next week.

Comments, suggestions?

 

As an ex-CFS customer, i feel obliged to mention that CFS tends to have high fees and very average performance, but even worse, they churn their portfolio so you end up with a very large tax bill each year.

Just to spell this out, if you buy BHP shares for $1000 and two years later they're worth $1500 and you still own them, you pay zero capital gains tax. With the five CFS funds I was in, if my units grew from $1000 to $1500 and I still owned them, I would have been hit up for a couple of hundred bucks in tax even though I never crystalised the gain. I'd have to find the tax money from other sources. When CFS quotes it's performance figures, it fails to mention all the extra money that you have to find to pay the tax even though you never realised the capital gain. With the BHP shares, you only pay the tax when you sell the shares and pocket the cash. CFS sucks, IMO.

Also, when you look at managed funds in general, many of them will divulge their top ten holdings. When you look at them, you'll frequently find the same stocks popping up. The reason is that most funds base themselves heavily on the ASX200 so as to be sure they don't deviate too far from it. You might find 80% of the stocks held are all the same, and are mostly the ASX200.

Specialist funds will be completely different of course, but *do* have a look at their holdings to see to what extent they are largely shadowing the ASX200. If you want the same exposure, but with lower fees, buy an ETF like STW or VAS, then maybe take a slice of your money and play some individual stocks or stick it in a completely off-the-wall managed fund.

Putting your money in three different funds, all of which are heavily based on the ASX200, may not achieve the diversification you seek and ETFs are a cheaper way of achieving the same result.

 

Some good points there also. I havent really heard much of ETF's so i might have a look into them.

Sim - your right about owning one share and it going downhill, the difference will be much greater then 10 years worth of a well balanced managed fund, for example.. I bought 5500 shares in Rivercity Motor Group, at around 50c or so, now they are 16c. So im down well over 50%, say.. $1100 or whatever it might be (i bought shares at 50c and again at 36c or so) so $1100 in fees for a well balanced less riskier MF one would think they would have your portfolio at least in the green.

Interesting point on the holdings of these MF, i have noticed majority that ive looked into hold the same, or very similar shares.. BHP, big banks, Telstra, etc..

The mention of paying fees on un-realized-capital-gains with CFS MF is something i have come across.. Ive paid hundreds in taxes as it is, and the fund it barely water level from the amount ive put into it over the past 2.5 years. maybe this is something to consider for future.. However, all funds are probably similar right? I'll look into ETF's now, and see how they differ.

Thanks for the feedback on the query though, much appreciated.

 

Thanks Sim. That does put alot into perspective.

This 'churn' you mentioned - makes sense (you obviously know what your talking about ) for example, i didnt receive distributions from the CFS MF for a period there, probably because the fund manager didnt turn over any shares, since they had dropped to such a low price. Now i see that when a distribution is paid, it is because the fund manager has seen that the shares are in the green, sold off the asset and distributed the profit accordingly.

Learning alot. Thanks for the input.

Another good one is the point on investing in say 2-3 MF that are all index based. Whats the point in paying 2% approx on the 3 MF that invest in the same type of strategies. Like you said, thats around 6% in fees for the same (similar) result across the board.

I checked out the ETF, they seem quite interesting, from what i can gather.. a managed fund listed and traded like shares? This will prove quite interesting. i will be looking into these alot more.

 

Hey,

While we are talking about trading strategies I thought I would add my 2 cents worth.

I have benefited from a couple of people and I thought I will share it. Two stock pros provide stock and ETF recommendations in real-time via email so you can immediately act on their recommendations. I have never lost money with them.

You should check out this excellent source about market timing and stock investing, it's quite useful: Stock Market Timing Results Model|Gil Morales-Virtue of Selfish Investing

-KGG

 

Tropo has quoted O'Neil.

William O’Neil's quote: “Diversification is a hedge for the ignorant”.

I think diversification Is a hedge. But hedging doesn't have to be a bad thing. Hedging is a bet both way. And of course, it come with a cost.

Studies have shown, that Asset Allocation determines 90% of the returns of a portfolio. However, picking the right assets, for the future, is like flipping coins. Nobody knows 'The next big thing' before it exists. By having a bit of everything, you will own the high flyers and the dogs. If you spread your portfolio across all markets in all sectors, then you get a Total Market return.

Combine this market with Bonds/Fixed interest, according to your risk tolerance. This percentage will affect how high your total return will be, but also how much you will lose.

ETFs are the cheapest way to diversify. And they are becoming more popular in Australia. Second best are index funds.

A dozen ETFs/Index Funds can hold thosands of companies. This controls company risks. Of course, it does not control Market risk. That's what the bonds are for.



Johny.