If you are inherently risk-averse, you need a diversified portfolio of solid stocks. I would aim for about 20 different names.
What makes for a solid stock? The answer is almost embarrassingly simple: it needs to be profitable, have a stable and durable business and not have excessive debts. The management needs to be good and its interests need to be aligned with those of investors. The company’s culture needs to be right. These companies will be more resilient if markets fall.
You may wonder, how on earth do I assess these things? But trust your instincts: look at what the company does and says and ask yourself, does it smell right? Do I like the way it behaves, the way it communicates? If you have any doubts, move on.
Once you have chosen your stocks you should always keep an eye on them but the type of stable business we have just described should make for a relatively low-maintenance portfolio.
A riskier approach, especially if you are sure you could live with falling down the rankings if things do not go according to plan allows for fewer stocks – maybe 10.
You could think about new, exciting companies, even if, as is often the case, they are not yet profitable. But remember, for every Google there are 100 Myspaces.
How do you pick the right ones on your own? You can glean a lot from your own knowledge and experience. Are there any new products or services you like or you think are especially good? Maybe other potential customers will too.
But the world of new-age companies can change quickly – so you’ll need to keep a constant eye on your portfolio and make quick and harsh decisions if the share price is not going your way.
Common sense will take you a long way here and it’s not as hard as it looks. Good luck!