How To Build A Portfolio To Reduce Risk

portfolioMitchell Clark: Putting together an equity market portfolio always requires conviction. In this market, stocks have not come off their highs very much at all. The main indices have been bouncing around quite a bit, but there is still a positive disposition to stocks with fourth-quarter earnings mostly coming in close to consensus.

Leadership in this market is still with the financials, the Dow Jones Transportation Average, and the NASDAQ Composite. These three metrics are good indicators as to where the broader market is headed.

In terms of portfolio construction, I’m a big believer in owning the market commensurate with owning a handful of positions with conviction—three to five benchmark stocks that can be accumulated when prices are down. These are the kind of stocks that a long-term investor can build wealth in over time using the short-term fluctuations in share prices for long-term advantage.

Wealth creation often does come from owning larger positions in a handful of stocks. Warren Buffett has consistently been this type of investor, taking on big positions after rigorous research.

But when it comes to stocks, there are always times when you are going to be wrong about the strength of a business and/or the marketplace’s capacity to recognize it. You still have to be nimble, willing to move on from non-performance and to remember that buying and selling stocks are business decisions.

Investing with conviction is something that can more easily be done with larger-cap companies or blue chips. Dividend reinvestment is a very good way to compound your investment return over time. There is always room for more aggressive bets, but accumulating positions in benchmark stocks is a great way to be invested without having to worry about your daily profits or losses.

Examples of companies that fit into long-term conviction plays are the same brand-name stocks we often consider in these pages. Companies like Johnson & Johnson (NYSE:JNJ), PepsiCo, Inc. (NYSE:PEP), Colgate-Palmolive Company (NYSE:CL), and Kimberly-Clark Corporation (NYSE:KMB) are blue-chip, dividend-paying stocks that offer great track records of long-term wealth creation for shareholders. (See “Two Steps to a Solid and Profitable Portfolio.”)

(...)Click here to continue reading the original article: How To Build A Portfolio To Reduce Risk [Johnson & Johnson, PepsiCo, Inc., Kimberly Clark Corp, Colgate-Palmolive Company]

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