Perhaps you would like to use my previous column on designing your own core satellite portfolio to start your own Australian share portfolio in a self-managed super fund (SMSF).
Let’s look at how it is done using the example of an investor who we’ll call Bill. Let’s assume Bill is new(ish) to building an equity portfolio and he has decided that he wants to invest $100,000 in Australian equities. There are lots of traps and pitfalls, so here is one strategy that has been designed to avoid some of them. It starts by using the ‘core satellite’ portfolio as a base and gradually adding more stocks overtime using the portfolio’s earnings.
An investment strategy
From my last contribution, an investor can put 80% of this amount (or $80,000) in an index exchange-traded fund (ETF) – say State Street’s STW – and 20% ($20,000) spread equally across four stocks from the ASX200 without facing too much volatility relative to the market.
We can break up the $80,000 destined for STW, say, into four parcels of $20,000 for four separate entry points to average risk over time. For amounts much smaller than $80,000, one or two parcels might suffice; for bigger amounts, take lots of advice.
When to buy
Take care with placing a limit order. I once tried that with a sizeable order for STW and only one share (worth about $50) happened to get set at a brokerage of $19.95 – not a good deal. The market rose rapidly so the rest of my order didn’t get set so my brokerage cost me about 40% of the share ($19.95 ÷ $50 = 40%)!
For an order ‘at market price’, try to avoid early morning and the lunchtime trading as the market can get hectic around those times. Placing a market order between 10:30am and 11:30am or 2:30pm and 3:30 pm often results in only a small blip in the traded price. Those times are often fine for volume, but take a peek (if you know how) before you place your order.
Unless you have access to market timing (mispricing) data that you trust, the first day that you trade doesn’t really matter unless the market is falling sharply – say over 1% a day. It might be that the market flicks back up or goes further down. It is often better to wait for a quiet day to buy.
It really hurts the ego if the market keeps falling and falling so, for me, it is better to lose a little and wait for at least some sign that the correction is over. For those who follow my indicators on my website, I usually try to wait for disorder and fear to be inside the ‘tram lines’ and for exuberance to be negative, but more of that in later contributions.
At intervals of no closer than a week apart, place buy orders for the other three parcels of STW noting the down-market syndrome. Let’s say Bill takes all this advice; after about a month he should have $80,000 set in the index. He will also have learned a little about placing orders and the volatility of the market; if not, he shouldn’t be in the market!
Choosing stocks
Next we need to choose the four stocks for him. I noted the stocks and sectors I avoid a few months ago (read more here). That is step one. Choose your exclusion list as it narrows down the research you must do to keep up-to-date.
The next step is to choose about three or four sectors and stocks from each from the ASX 100 (smaller cap stocks can be left for later in the strategy). The old standards like BHP, RIO, big banks, etc come to mind – but they must fit with the investor’s philosophy and objectives. Check their recommendations on the Reuters website (as previously suggested – start with reuters.com and drill down to the chosen stocks) and cull any stock that does not have a score of 2.5 or better (one is the best).
Buy each stock one week at a time – as with the index. During the buying process, the investor is not balanced by any normal standard until the end but the 80% core means too much damage probably cannot be done along the way.
So now Bill has a portfolio of four stocks and the index. Not very exciting, but at least he is in the market and has learnt a lot along the way.
Next week, I’ll explain how we’re going to choose some more stocks for Bill to buy with the money earned by his fund, with the aim of eventually growing his portfolio up to about 10 to 15 stocks.
Ron Bewley, executive director, Woodhall Investment Research Pty Ltd.
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
