A winning portfolio

The cornerstone of successful investing is diversification - the process of spreading your investments across a range of different assets to minimize risk. If one or two investments perform poorly, the profitable ones will counterbalance those losses, resulting in net profits overall.

Building a diversified, winning portfolio is not just about buying stocks from different companies; it also involves knowing how many different stocks to include in your portfolio. As an investor, you should divide your capital into a portfolio of at least eight and a maximum of thirty stocks.

Why eight? Anything less than that means you're not diversified enough. If you invest everything into three stocks, all three could potentially underperform. A minimum of eight stocks ensures that your risk is spread out across several investments.

Why not more than thirty? While there's no upper limit, monitoring a larger number of stocks can become challenging. Of course, if you're comfortable with more and you can monitor them effectively, that's fine. However, typically, anything more than thirty is not necessary.

Diversification is the investor's best tool for capital preservation. Remember, no matter how skilled an investor you are, there's no such thing as a sure win company or stock. By diversifying your portfolio, you minimize the impact of any bad investments on your overall capital.

Now that you understand why you need to diversify, the next question is, how do you go about allocating your investment capital?

Let's assume you have $10,000 to invest. The first step is to identify at least eight or ten companies with strong prospects. These could include a mix of individual company stocks and Exchange Traded Funds (ETFs) which offer additional diversification by tracking different markets or sectors.

Once you've selected your investments, aim to allocate an equal amount to each stock. This doesn't mean buying the same number of shares in each company, as share prices vary. It means investing the same amount of money in each one. Whether a share costs $1 or $1,000 is not important. What's important is the quality of the company. If a company's shares are high-priced, you simply buy fewer shares, while if they're low-priced, you buy more. The key consideration is the potential return on your investment.

After your initial investment, as you continue to save money from your income, you should consistently add to your investments. The key to investing is to consistently spend less than you earn, and invest the surplus to grow your portfolio over time.

Every time you add more funds, strive to balance your portfolio as much as possible. What does this mean? Ideally, you want each stock to maintain a roughly equal percentage of your total portfolio. So, if one stock doubles in value while others remain unchanged, you might need to rebalance by investing more in the other stocks or even selling some of your shares in the successful stock to maintain that balance.

This might sound counterintuitive, but it's important to remember that diversification is about managing risk. If a single stock comes to represent too large a percentage of your portfolio, you're taking on more risk than necessary. Rebalancing ensures that no single investment can significantly harm your portfolio.

It's not enough to diversify your investments among different companies; you also need to diversify across different sectors. This means you shouldn't put all your money into one sector. For example, if you're buying ten stocks, don't buy all from the financial sector or energy sector. Why? Because stocks within a sector often move in tandem. If the sector drops, all your stocks drop, and your portfolio will take a heavy hit.

By diversifying across sectors, you protect your portfolio from significant drops in any one sector. If one sector is doing poorly, another sector might be doing well, and this will offset the losses. It's also important to avoid investing too heavily in cyclical sectors, which are highly sensitive to the fluctuations of the economy.

To further refine your investment strategy, you should understand the different types of stocks available in the market. In the next part of this lesson, we'll look into cyclical and defensive sectors, growth and value stocks, large-cap and small-cap companies, and more.

Successful investing is a marathon, not a sprint. It requires patience, due diligence, and the ability to learn from mistakes. With the right strategies and the ability to adapt to market changes, you can build a winning portfolio that offers both stability and substantial growth potential over the long term.

When investing in stocks, it's vital to understand the various sectors in the market. These sectors are like different neighborhoods in a city, each with its unique flavor and characteristics. In this chapter, we will guide you through these 'neighborhoods' and explain why knowing them inside out can help you make wise investment decisions.

Each sector in the stock market consists of companies that operate in similar industries. By understanding these sectors, you can better spread your investments across a range of industries, which in turn can mitigate risks and potentially enhance returns. So, without further ado, let's jump in!

First, we have the cyclical sectors, which are directly influenced by the overall health of the economy. Companies in these sectors, such as leading banks, insurance companies, and financial firms, tend to perform well during periods of economic prosperity and suffer during downturns. Despite their inherent volatility, cyclical sectors can offer higher potential gains, making them a favorite for investors willing to take on more risk.

Moving onto the next set of sectors, known as moderately cyclical sectors. These sectors are less sensitive to the business cycle but still slightly influenced by it. This balance between growth and stability makes these sectors a preferred choice for many investors.

Among these, the technology sector stands out due to its impressive growth potential. Companies under the tech sector umbrella engage in the design and development of various technologies, ranging from hardware and software to computer equipment and components. Think Apple, Microsoft, Salesforce.com, Adobe, and Paypal, to name a few.

You might be wondering why we aren't including social media and entertainment giants like Facebook, Netflix, and Twitter under the tech sector. Well, these companies were indeed once part of the tech sector, but they've since been assigned their own sector: communication services.

This change was initiated to better categorize these companies, as they primarily provide platforms for communication rather than traditional technology services. Whether it's Facebook for social interaction, YouTube for video sharing, or Google for search and information, these companies have a significant impact on how we communicate and consume content today. This newly formed sector also includes telecom giants like AT&T and media conglomerates like Disney.

While technology and communication services sectors capture the spotlight for their growth potential, other sectors such as industrials and energy play crucial roles in our economy.

The industrials sector comprises companies that manufacture machinery, industrial products, and handheld tools, including aerospace and defense firms. Think Boeing, which produces airplanes and defense technology. There are also companies like Deere that make construction equipment.

Lastly, we have the energy sector, which heavily depends on oil prices. The sector is known for its volatility, given its exposure to fluctuations in global energy markets. Major players here include Chevron, BP, ExxonMobil, and ConocoPhillips. Despite the risks, renowned investors like Warren Buffet have substantial investments in this sector, demonstrating the potential rewards for those who can navigate its uncertainties effectively.

Now that we have delved into different sectors, it's important to understand how to use this knowledge when constructing your portfolio. Simply put, don't put all your eggs in one basket - or, in this case, don't put all your stocks in one sector.

Spreading your investments over various sectors allows you to mitigate risk and capture growth across different areas of the market. How you allocate your investments across sectors should align with your risk tolerance and financial goals. For example, if you're a conservative investor who prefers stability, you might want to focus on investing in defensive sectors. However, if you're willing to take on more risk for higher growth, a mix of defensive and moderately cyclical sectors could be a better fit.

To delve deeper into these sectors and understand how to invest in them through Exchange Traded Funds (ETFs), you can visit sector-specific websites like sector spider dot com. Here, you will find comprehensive information about different sectors, the companies within them, and relevant ETFs.

Now that you're familiar with the various sectors, the next key factor to consider when constructing a portfolio is your investment objective. You might be thinking, "Isn't the objective obvious? I want to make money!" Yes, making money is the ultimate goal, but there are many paths to get there.

Just as you would choose a car based on its intended use—be it racing, comfort, or showing off—you need to have a clear objective for your portfolio. It might be growth, dividends, or a combination of both. The critical point here is that your portfolio should align with your specific financial goals and risk tolerance.

If we're focusing on stocks for their dividends, there are a few specific criteria we need to run through.

• Dividend Yield: The stock should have a dividend yield of at least 4 to 5 percent. You might wonder why this is important. Well, if the yield is less than that, you're likely better off investing in a bond or a fixed deposit in the bank.
• Consistency: The company should have a history of consistently increasing its dividend per share for at least the last five years. It indicates that the company is committed to returning profits to its shareholders.
• Net Income and Cash Flow: Similarly, the company should demonstrate a track record of consistently increasing net income and cash flow from operations for the past five years. This shows that the company's business is growing and is capable of generating increasing cash flows.
• Share Price Stability: When looking at the last five or ten-year chart, we want to see that the price is either moving sideways or trending up, not on a perpetual downtrend. Remember, we're interested in the dividends, not necessarily high growth. So, if the stock price has been stagnant for ten years, that's acceptable because you're collecting dividends.
• Defensive Companies: As a dividend investor, you should lean more towards defensive companies that can continue to pay dividends even during economic downturns. Cyclical companies like airlines, commodities, energy, shipping, and real estate should be avoided.
• Debt Level: Considering that you intend to hold these companies for the long run, it's best to choose those with low, conservative debt levels.
• Dividend Payout Ratio: The company should have a dividend payout ratio of between 20 to 100 percent but not more than 100 percent. If it's more than 100 percent, it's a red flag that the company is paying out more in dividends than it's earning, which is unsustainable in the long run.

We've talked a lot about dividend yield, but what exactly does it mean?

Dividend yield is calculated by taking the dividend per share and dividing it by the price per share. For example, let's say the share price is a dollar and, in a year, the company pays dividends of ten cents per share. Hence, for every one dollar you paid for the stock, you're getting back ten cents in dividends. Therefore, the dividend yield is ten percent (ten cents divided by a dollar).

Now, some investors might think that a high and increasing dividend yield is a good thing, but that's not always the case. Why? Because it's possible for a company's dividend yield to rise while the actual dividend they pay is decreasing. This happens if the share price drops faster than the dividend. Therefore, both the dividend yield and the dividend per share must be rising.

The dividend payout ratio is another essential concept to grasp. It is calculated as the dividend per share divided by the earnings per share. If a company earns one dollar per share and pays a dividend of fifty cents, the payout ratio is fifty percent. In other words, out of a dollar that the company earns, they pay fifty cents as dividends.

However, we want to avoid companies with a payout ratio of more than 100 percent. It means that the company is paying more in dividends than it's earning, which is not a sustainable practice and might cause financial issues in the long term.

When you're investing in dividend stocks, adopt a buy and hold approach. Perform your fundamental checks and apply dollar-cost averaging.

Bear in mind that there's a twenty percent withholding tax on dividends for US stocks. Therefore, as a non-US citizen, it might be more beneficial to invest in companies from your home country or other countries that offer tax advantages.

Every investment comes with its risks, and dividend stocks are no exception. It's crucial to be vigilant and ensure that the company isn't just increasing its dividend yield by lowering its share price. Remember, we need both the dividend yield and the dividend per share to rise.

Furthermore, avoid companies with a dividend payout ratio of more than 100 percent. In the short term, it might seem like a good deal, but in the long run, it's a warning sign of potential financial instability.

To sum up, constructing a portfolio focusing on dividend cash cows involves a careful selection of companies based on specific criteria. It requires a keen understanding of key concepts such as dividend yield and payout ratio, as well as a disciplined investment approach. It's not merely about collecting dividends; it's about investing wisely and sustainably for long-term wealth generation.

To start, we need to comprehend what a dividend payout entails. It's simple: if a company is earning a dollar and they're paying you two dollars, where does the extra dollar come from? Evidently, it's coming not from their profits, but from their bank balance. Over time, this isn't sustainable as the bank balance could eventually run out or the company could resort to borrowing to pay dividends.

Another red flag is if the company is selling new shares to raise capital for dividends. Thus, for dividends to be sustainable, the payout ratio must be less than 100%. This implies that the company is paying you from its earnings, which is a more sustainable approach.

Furthermore, the debt servicing ratio should be less than 30%. This figure is obtained by dividing the net interest expense by the net operating cash flow. When searching for dividend-paying companies, ensure they meet these criteria.

For instance, I personally have a portfolio focused on dividends. Most of the companies I invest in that pay high dividends are Real Estate Investment Trusts (REITs), primarily located in Singapore. Singapore is home to one of the world's largest REIT markets, with yields typically ranging from 5% to 7%, far better than traditional companies.

I also have some companies based in Hong Kong or China with good dividend yields. However, I typically don't buy US stocks for dividend yield because of the 30% tax on dividends and the fact that most US companies have relatively low yields. I mainly invest in US companies for my growth portfolio, not my dividend portfolio.

Now, let's delve into how you can screen for high dividend stocks. This can be quite handy if you aim to build your portfolio around this. For US companies, you can use a tool like Finviz. You'll find an option for a "dividend yield" under the "descriptive" tab, and you'll want to set it to be over 5%.

Under the "fundamental" tab, you may want to input some key fundamentals such as earnings growth for the next five years (positive), sales growth for the last five years (positive), and current ratio (greater than one). From here, you'll be given a list of companies that fit these criteria.

But what's the next step? It's essential to look at the chart over the last five to ten years, ensuring the price is either consistently moving sideways or going up, but not on a downtrend.

To check the specific criteria such as the dividend payout ratio and consistently increasing dividends per share, you can use resources like MorningStar. Alternatively, you can visit the company's website and download their financial report from the Investor Relations section to conduct a more in-depth analysis.

For international stocks (companies outside the US), a tool like investing.com is useful. By setting filters like a minimum dividend yield of 5%, a 5-year earnings growth of at least 3%, a 5-year sales growth of at least 3%, and a payout ratio of less than 100%, you'll be able to narrow down your search considerably.

While high yields can be enticing, remember: if it's too good to be true, it often is. So, always consider the other factors, such as whether the share price is consistently rising and the dividend per share is increasing.

Let's move on to the second category of investment portfolios, "Large Cap Predictables." These are a favorite category for legendary investors like Warren Buffett. They consist of large companies with wide economic moats and predictable earnings and cash flow from operations.

These companies usually sell products or services that are defensive in nature and never go obsolete. With slow but steady capital appreciation, these companies tend to grow between 5% to 10% per year on average. For these types of companies, you should expect to see a slow and steady uptrend when you look at their charts.

There isn't a straightforward answer to this as it depends on individual investment styles and objectives. If you're looking for a steady income stream, high-dividend stocks might be more suitable. But if you're after long-term capital appreciation, large cap predictables could be more appealing.

The crucial point is to understand your investment goals and risk tolerance before deciding where to invest. Once you've identified these, you can use the screening methods discussed above to find the best companies that meet your specific needs.

In the following chapters, we'll explore more investment strategies to help you make informed decisions and optimize your investment portfolio. Stay tuned!

In the vibrant arena of the stock market, different stocks possess unique characteristics. To simplify our understanding, let's divide them into four distinct categories: Large Cap Predictables, Large Growth Stocks, Deep Cyclicals, and Turnarounds. Each of these categories requires a different investing strategy based on their inherent traits and market performance.

Large Cap Predictables are companies with a vast market capitalization, stable growth, and predictable returns. If you're looking for a classic tortoise in the hare-tortoise story, this category is it! They might not sprint with volatile leaps, but they demonstrate a steady, slow pace of growth. Examples include brands like Unilever, Procter and Gamble, Home Depot, Yum Brands (owner of KFC, Taco Bell, Pizza Hut, and Long John Silver's), Colgate-Palmolive, 3M, Coca-Cola, and Pepsi-Cola.

Their stock prices generally showcase minor fluctuations and consistent, if slower, growth. Hence, for investors who favor safety and predictability, these stocks present an ideal investment opportunity. A popular strategy to employ while investing in these companies is dollar-cost averaging, where you invest a fixed dollar amount regularly, thus averaging your cost over time.

While Large Cap Predictables could be termed the 'safe bet,' Large Growth Stocks are their more adventurous siblings. These are mature, large companies demonstrating high growth potential of at least 25% or more annually. Many of these high-growth companies are from the technology sector, though not exclusively. Amazon, Netflix, Alphabet (Google), Nike, Alibaba, Facebook, Adobe, and Tencent are some examples.

Their share prices often show a steep upward trajectory, akin to scaling a mountain slope. High growth rates, however, come with higher price tags, meaning these stocks often sell at a premium. Rarely do you find them undervalued, except during severe bear market recessions when they may sell at a discount.

It's essential to note that these companies are subject to high expectations. If their projected growth rate slows, their stock price can drop drastically, by up to 50%. Thus, these stocks necessitate careful monitoring. If the price climbs too rapidly and moves far from the moving averages, or if the stock enters a downtrend, it's advisable to exit before further potential loss. Though potentially profitable, these stocks are risky and should be managed attentively in your portfolio.

Deep Cyclicals represent capital-intensive companies or industries that can't respond quickly to demand changes. They're like massive ships that can't turn or stop on a dime. An example can be the shipping industry, which can't quickly dispose of ships or lay off workers during a recession, leading to losses.

Deep Cyclical stocks exhibit extreme volatility, with their stock prices oscillating significantly during economic cycles. Notable examples include Caterpillar, real estate companies, banks, offshore and marine companies, and commodity companies.

An interesting trait of these stocks is that if you buy and hold them for an extended period, you may end up at the same place where you started or even incur a loss due to their cyclic nature. Thus, for Deep Cyclical stocks, timing is crucial. The best strategy is to buy them when they are near a support level, often when they are underperforming, and sell them when they reach cyclical highs, which usually coincide with periods of strong performance.

Turnaround stocks are the final category that we will explore in this chapter. These stocks represent companies that have experienced significant problems but have potential for recovery. Investing in these stocks often involves a higher degree of risk, and a detailed analysis of these stocks will be presented in the following chapter.

As we conclude this chapter, remember that the stock market isn't a monolith. It's a dynamic landscape with diverse investment opportunities. Understanding the unique characteristics of these categories can help you to construct a balanced and resilient portfolio that matches your risk tolerance and investment goals.

Turnaround stocks represent companies that have experienced significant problems but are poised for recovery. These companies have often undergone financial distress, but through changes in their management, business strategy, or market conditions, they're now on the path to revival.

Investing in turnaround stocks can be risky, but it also offers significant upside potential. Given their past troubles, these companies often have their stocks undervalued, providing an excellent buying opportunity for investors. However, it's crucial to thoroughly evaluate the company's prospects for recovery before making an investment decision.

The risks involved in investing in turnaround stocks are primarily related to the uncertainties surrounding the company's recovery. The planned turnaround may not materialize, or it may take longer than expected, leading to disappointing returns.

On the other hand, if the company's turnaround efforts are successful, investors can realize substantial gains. This is because the stock's price will likely rise as the company's financial performance improves and investor confidence is restored.

Investing in turnaround stocks requires a thorough analysis of the company's financial condition, the competitive landscape, and the broader economic environment. It's also essential to understand the company's turnaround strategy and assess its likelihood of success.

Some investors use a contrarian approach to investing in turnaround stocks, buying when others are selling and selling when others are buying. This strategy can be successful, but it requires a deep understanding of the company and the factors influencing its stock price.

Finally, diversification is key when investing in turnaround stocks. By spreading your investments across several companies or sectors, you can mitigate the risks associated with this type of investment.

Several companies have successfully executed turnarounds in the past. These include Apple, which was on the brink of bankruptcy in the late 1990s before Steve Jobs returned as CEO and introduced a series of successful products. Another example is General Motors, which filed for bankruptcy during the 2008 financial crisis but has since returned to profitability.

In conclusion, turnaround stocks offer an interesting investment opportunity for those willing to take on higher risk for potentially higher returns. By conducting thorough research and maintaining a diversified portfolio, investors can benefit from the potential upside of these investments

The concept of turnaround stocks is a key part of our lesson today. Essentially, a turnaround stock is a share in a company that has experienced some troubles, often reflected in a declining stock price, but shows potential for a significant rebound. A question naturally arises here: How can one identify these turnaround opportunities?

Recognizing a turnaround opportunity is more of an art than a science. You'll be on the lookout for established companies that have hit a rough patch, causing their stock prices to dip. But, it's crucial to differentiate between those experiencing a temporary setback and those in a long-term decline. What are the typical hallmarks of a promising turnaround stock?

To qualify as a potential turnaround, a company should have solid fundamentals, such as strong brand equity, competitive advantage, and robust long-term economics. These factors remain intact despite temporary setbacks. Nevertheless, one must steer clear from companies embroiled in financial scandals. Why is this distinction so important?

Simply put, when a company is accused of financial irregularity, the situation tends to worsen over time. In contrast, a firm affected by temporary bad news can recover once the issue is resolved. Understanding this differentiation can save you from costly investment errors. Can we see some real-world examples to illustrate this?

Let's take McDonald's and KFC as examples. In the past, they were both implicated in a food scandal in China, where they had sourced expired food from a supplier. This incident understandably led to a decline in their share prices. However, discerning investors saw the situation for what it was - a temporary setback. Once these companies resolved the issue, their stock prices recovered, providing a profitable opportunity for those who had invested during the downturn.

Apple provides another noteworthy example. Following the death of Steve Jobs, the company's share price dipped as investors feared for its future. However, those who recognized Apple's solid fundamentals and continued product innovation as signs of resilience reaped benefits when the company bounced back.

In recent years, we have seen similar patterns with Facebook, United Airlines, and Tencent, all of which underwent temporary crises but remained fundamentally strong businesses. Therefore, these stocks presented attractive turnaround opportunities for observant investors.

Remember, timing is crucial when investing in turnaround stocks. It's essential not to "catch a falling knife" – that is, don't buy a stock when it's in a free fall. Wait until the stock stabilizes or shows signs of a rebound before investing. Is there a structured way to find these opportunities?

Absolutely! Keeping an eye on the news can reveal potential turnaround opportunities. Financial news platforms such as CNBC or Google Finance often report when companies face problems. The trick is to discern whether the company's issue is temporary or indicative of deeper, more lasting trouble. Once you have identified a potential opportunity, it's essential to do thorough research to confirm that the company meets all the necessary fundamental criteria.

Now, let's turn to the other exciting category of investment we'll explore today - small cap fast growers.

Small cap fast growers are young, small companies that offer huge growth potential. These companies may not be famous yet, but they show promising signs of becoming the next big thing. Although investing in such companies might carry higher risks, the rewards can be substantial if you pick the right ones. How can we identify these high-potential companies?

Identifying small cap fast growers requires keen observation and in-depth research. Unlike turnaround stocks, these companies might not have wide economic moats or strong brands yet. However, they show potential for significant growth, making them an attractive investment option. But how can we lessen the inherent risks of investing in these small companies?

Investing in small cap fast growers does entail risks, as these companies may face more potential cash flow problems due to their size. Therefore, when investing in these companies, it's crucial to ensure they have low or conservative debt, positive cash flow from operations, and positive free cash flow. This can offer some security in your investment. Can we illustrate this with examples?

Well, the best examples would be the giants of today that were once small, such as Apple and Facebook. Investors who bought these companies when they were still small have seen immense returns on their investments. The trick is to identify such potential winners early on.

A comprehensive screening process can help you spot small cap fast growers. By using specific criteria such as revenue growth, profitability, and low debt levels, you can identify promising companies for your investment portfolio.

Let's start by understanding the types of companies in which we can invest based on their market capitalization. We have mega cap, large cap, mid cap, small cap, micro cap, and nano cap companies. So what do these categories mean, and how can they influence our investment choices?

Simply put, these categories classify companies based on their total market value or market capitalization. It's calculated by multiplying the company's stock price by the number of its outstanding shares. Now, this classification can give you a rough idea of the company's size, financial stability, and growth potential.

For instance, small cap companies usually have a market cap between $300 million to $2 billion, while micro companies range from $50 million to $300 million. While they might be small today, they could grow into big companies tomorrow. The idea here is to identify these diamonds in the rough and invest when they're still relatively unknown.

The answer lies in their potential for significant growth. Sure, investing in small companies might seem risky, but remember, every great company starts small. When we select small, micro, or nano companies, we're not merely investing in their current state. We're investing in their future, in their potential to become the next big thing.

Now, out of the approximately 7,000 stocks available, focusing on small companies under a market cap of $2 billion reduces the list to around 3,000. We're not just simplifying our task, but we're also getting closer to finding those hidden gems with enormous growth potential.

The average trading volume of a stock indicates how much of the stock is bought and sold over a given period. Some might argue that higher volume stocks are preferable as they offer better liquidity. But is this true for long-term investing? Not necessarily.

Volume is a critical factor for short-term traders who require high liquidity. But as long-term investors, we can afford to look past volume. In fact, some of the small companies we're targeting might not be widely known yet and might have low trading volumes. However, they could also present great investment opportunities as they may be undervalued and selling at a discount.

After narrowing down the pool of potential investments based on market cap, we need to delve deeper and study their fundamentals. This refers to analyzing the health and performance of the company from a financial perspective. Key metrics we should consider include the company's growth prospects, return on equity, and sales growth.

Specifically, we're looking for companies with high growth potential. We want to see an earnings growth rate for the next five years of at least 20%. We're searching for companies with a return on equity above 10%. Furthermore, we would like to see positive growth expected for next year, and sales growth for the last five years should ideally be over 20%.

It might happen that after applying our criteria, only a few stocks remain. While these could be great investment opportunities, having a limited pool of options might mean that our criteria are too strict. If this is the case, we might want to adjust our requirements slightly. For instance, we could lower our growth expectation to 15% instead of 20%.

If diving deep into a company's financials sounds overwhelming, or if you're someone who prefers a simple investment approach, Exchange-Traded Funds (ETFs) might be the perfect solution. ETFs can help to diversify your portfolio as they involve purchasing a collection of stocks from various companies, reducing the specific risk associated with investing in a single company.

With ETFs, you have numerous options. You can invest in country-specific ETFs or sector-specific ETFs based on future growth predictions. There are also commodity ETFs and inverse ETFs that let you profit from a market decline. Some investors choose to build their entire portfolio with ETFs, and they can indeed be a profitable choice.

Once you understand the various options and investment approaches, constructing your portfolio becomes an exercise in strategy and personal preference. For instance, if you're a conservative investor, you might prefer a 50-50 mix of ETFs and predictable companies. If you're more aggressive, you might lean towards a portfolio of growth companies and small cap high-growth companies.

The essential point here is that you have the freedom to build a portfolio that aligns with your risk tolerance and financial goals. It's like being at a buffet: you choose what you want to eat based on your tastes and dietary preferences.

In conclusion, constructing a winning portfolio requires a solid understanding of the different categories of stocks, a strategic approach to picking the right ones, and the ability to adjust your investment criteria when needed. Always remember, the goal of investing is not just to make money, but to make informed decisions that can help you achieve your long-term financial goals. Stay tuned for the next lesson where we continue this exciting journey to financial mastery. Enjoy your investing journey!

Building a Winning Portfolio

Diversifying investments to reduce risk and preserve capital. At least 8-30 stocks, no sure wins, long-term win rate of 80-90%.

Portfolio Allocation

Divide initial capital equally into a portfolio of 8-30 stocks. Allocate money equally between stocks, regardless of share price. Focus on percentage return from investment.

Dollar Cost Averaging

Investing a fixed amount at regular intervals to balance a portfolio equally between 8-10 stocks.

Rebalancing a Portfolio

Making sure each stock has a roughly equal percentage of the total capital to maintain a diversified portfolio.

Balanced Portfolio

Investors should diversify their portfolio by investing in different sectors to avoid losses from one sector collapsing.

Defensive and Cyclical Sectors

Stocks can be divided into defensive stocks (products/services that are necessary regardless of economic cycle) and cyclical stocks (sales affected by economic cycle).

Defensive Stocks: Low to moderate growth of 5-10% with less volatility. Outperform in recession, underperform in economic booms.

Defensive and Cyclical Stocks

Stocks are divided into defensive and cyclical sectors. Defensive stocks are healthcare, consumer staples, and utilities. Cyclical stocks are sensitive to the economy and can be volatile but offer higher gains.

Cyclical Stocks

Four sectors of cyclical stocks in the US market are basic materials, finance, consumer discretionary, and real estate. Companies in these sectors are Dow Chemical, Citigroup, Home Depot, and Regency Centers.

Cyclical and Moderately Cyclical Sectors

Investing in cyclical sectors can be volatile but have higher potential gains. Moderately cyclical sectors are higher growth and less sensitive to the business cycle. Examples include technology (Apple, Microsoft, etc.) and communication services (Facebook, Netflix, etc.). Industrials and energy are not as favorable due to their sensitivity to oil prices.

Portfolio Construction: Investing in various sectors to reduce risk, with defensive sectors for conservative investors and cyclical sectors for more aggressive investors.

Dividend Cash Cows

Investors focus on companies that pay dividends for consistent yield or cash flow. Criteria includes dividend yield of at least 4-5%, increasing dividend per share for 5 years, increasing net income and cash flow, and stable share price.

Dividend Yield

Dividend yield is calculated by taking the annual dividend per share divided by the stock price. For stocks bought for dividends, aim for a yield of 4-5%, with a dividend payout ratio of 20-100%. Use a dollar cost averaging approach and bear in mind that US stocks have a 20% withholding tax on dividends.

Dividend Yield and Payout Ratio

The dividend yield is the dividend per share divided by the price per share. Payout ratio is the dividend per share divided by the earnings per share and should be between 20-100%.

Screening for High Dividend Stocks

Learn how to screen for high dividend stocks using Finviz. Understand the criteria for sustainable dividends and the tax implications of US stocks.

Summary:

Screening for High Yield Stocks

Screen stocks with dividend yield over 5%, positive earnings and sales growth for the last 5 years, and current ratio greater than 1. Research on international stocks can be done on Investing.com. For Singapore stocks, 112 companies are screened with dividend yield over 5%.

Screening for High Dividend Stocks

Using a 700-company list, screen for 15 best dividend companies with at least 1% growth, a payout ratio of less than 100%, and a dividend yield of at least 5%.

Large Cap Predictables

Investing in large, established companies with low risk and steady growth.

Large Growth Companies

Investing in mature, large companies with high growth potential of 25% or more. Price usually above intrinsic value.

Risks of Growth Companies

Growth can't continue forever and share prices can drop drastically if growth slows. Need to watch carefully and take profits when price gets too high.

Deep Cycle Companies

Companies with capital intensive industries that cannot respond quickly to demand changes, resulting in volatile share prices.

Deep Psychicals

Buy when near support level, sell when near resistance. Price to book ratio used to get good discount. Highly risky.

Turnarounds: Taking advantage of special situations when a good company's stock is beaten down by temporary bad news. Examples include McDonald's and KFC during the China food scandal, Apple after Steve Jobs' death, and United Airlines after the dragging incident. Currently looking at Facebook as a potential turnaround.

Facebook and Tencent: Two tech companies hit by bad news, resulting in stock price drops. Turnaround Opportunities: Investing in great companies at discounted prices.

Small Cap Fast Growers

Investing in small companies with huge growth potential, but more risky. Possibility of high returns if companies turn into medium to large. Must have low debt, positive cash flow, and free cash flow.

Filtering Stocks

Finding stocks with good fundamentals by filtering for market cap, earnings growth, return on equity, and sales growth. Only two stocks remain after filtering.

Seven Categories of Stocks to Invest In

Overview of seven categories of stocks to invest in, including ETFs, predictable companies, growth companies, and small cap funds.