Snowball Effect & Time Crossing
A stock portfolio is a collection of stocks or equities held by an individual investor or investment company.
In other words, it is the collection of all investments in stocks that a person or entity holds.
Equity portfolios can vary widely according to investors’ preferences and goals.
Some investors may prefer a more diversified portfolio that includes stocks from different industries and sectors to reduce overall risk, while others may focus on a particular industry or type of company in which they have more confidence or experience.
Building an equity portfolio is an investment strategy that offers a number of significant advantages, which can contribute to long-term wealth growth and the realization of an investor’s financial goals.
NINE GOOD REASONS TO BUILD A STOCK PORTFOLIO:
1–Capital growth
Historically, the stock market has offered higher returns than many other types of investment over the long term.
Therefore, investing in stocks can help investors achieve significant capital growth over time.
2–Diversification:
A well-diversified stock portfolio can reduce overall risk.
Investing in a variety of stocks from different industries and with different characteristics can protect investors from the negative impact of industry- or company-specific events.
3–Dividends:
Many companies distribute dividends to their shareholders as a form of profit sharing.
Investors can use these dividends as a passive income stream or reinvest them to further increase the value of their portfolio.
4–International exposure:
Investing in stocks allows investors to access international markets and take advantage of growth opportunities around the world. This international exposure can help reduce the risk associated with geographic concentration and take advantage of various global economic dynamics.
5–Liquidity:
The stock market offers greater liquidity than other types of investments, allowing investors to buy and sell stocks with relative ease.
This liquidity provides flexibility for investors to change their portfolios in response to market changes or financial goals.
6–Protection from inflation:
Stocks have been shown to provide inflation protection over the long term.
Because the value of stocks is generally linked to economic growth and rising prices, investors can preserve the purchasing power of their capital over time.
7–Favorable taxation:
In many countries, investments in equities can benefit from favorable tax regimes, such as lower capital gains tax rates than other types of investments.
8–Access to different asset classes:
Through the stock market, investors can access a wide range of asset classes, including large and small company stocks, growth stocks, and value stocks, allowing them to further diversify their portfolios.
9–Transparency and information:
The stock market is characterized by wide availability of information and transparency.
Investors can easily access financial data and company reports, enabling them to make informed investment decisions.
In conclusion, building an equity portfolio can offer a number of advantages, including capital growth, diversification, income streams, international exposure, liquidity, inflation protection, favorable taxation, access to different asset classes, and trading transparency.
However, it is important that investors understand the risks associated with investing in equities and adopt a well-considered investment strategy based on their financial goals and risk profile.
Basic criterias and strategies for building a stocks portfolio
Creating an effective stock portfolio requires careful planning and the adoption of well-thought-out investment strategies.
Some of the best strategies and criterias for creating a stock portfolio are described below:
Diversification
Diversification is one of the most important strategies for creating a resilient stock portfolio.
It consists of investing in a variety of assets, sectors, geographic regions and types of companies in order to reduce the overall risk of the portfolio.
Here are some ways to effectively diversify an equity portfolio.
Economic sectors:
Invest in different industries and avoid concentrating the portfolio too much in one specific sector.
For example, in addition to traditional sectors such as technology and health care, you might also consider emerging sectors such as renewable energy or information technology.
Types of companies:
Incorporate both large-cap (blue chip) and small- and mid-cap (mid-cap and small-cap) companies into the portfolio.
Large companies tend to be more stable, while small and mid-cap companies may offer more growth opportunities.
Geographic regions:
Invest in global markets to reduce exposure to the risk of a single domestic market.
An international portfolio may include stocks from developed markets such as the United States, Europe, and Japan, as well as emerging markets such as China, India, and Brazil
Asset types:
In addition to stocks, you can diversify your portfolio by including other asset types such as bonds, commodities, and real estate. This can help reduce overall portfolio volatility and mitigate risk.
Diversification not only helps protect the portfolio from fluctuations in individual stocks or sectors, but can also maximize overall returns in the long run.
Long-term investing
Long-term investing is a strategy that focuses on buying and holding stocks for extended periods, often years or even decades. This strategy is based on the idea that over the long term, stock markets tend to appreciate and generate significant returns.
Here are some reasons why long-term investing can be beneficial:
Reduction of market timing risk:
Long-term investing allows investors to avoid trying to predict short-term market fluctuations.
By giving up trying to time the market, investors can reduce the risk of making poor investment choices based on emotions or incorrect forecasts.
Harness the power of compounding returns:
Over time, reinvested returns generate additional returns, known as compound returns.
Maintaining a long-term stock portfolio allows investors to take full advantage of this principle and benefit from the snowball effect on returns.
Capitalizing on economic trends:
By investing for the long term, investors can take advantage of economic and technological trends that occur over the years.
For example, innovative and growth companies could offer significant returns over the long term to the extent that their technology or products gain market adoption.
Long-term investing requires patience, discipline, and a long-term view.
Investors must be prepared to endure short-term market fluctuations and remain focused on long-term portfolio objectives.
Analysis and Careful Stock Selection
Fundamental analysis is a methodology used by investors to assess the intrinsic value of a company and determine whether its shares are undervalued, balanced, or overvalued relative to their current market price.
Income and profits:
Review the company’s financial statements, including income, profits, profit margin and cash flow, to assess financial health and past performance.
Capital structure:
Assess the company’s capital structure, including debt, equity, and debt-to-capital ratio, to understand the level of leverage and associated risk.
Growth prospects:
Examine the company’s growth prospects, including factors such as innovation, market positioning, competition and industry trends, to assess the potential for future growth
Relative evaluation:
Compare the company’s financial data and valuation metrics with those of its competitors and the industry as a whole to determine whether the stock is undervalued or overvalued relative to its peers.
Based on fundamental analysis, investors can select stocks of companies that they believe have strong growth potential and intrinsic value.
This strategy requires extensive research and careful evaluation of individual companies and their financial fundamental
Dollar Cost Averaging (DCA) is an investment strategy where an individual invests a fixed amount of money at regular intervals, regardless of market conditions.
This approach reduces the impact of market volatility by buying more shares when prices are low and fewer when prices are high, potentially lowering overall investment risk.
Historical Overview
During the period from 2008 to 2022, financial markets faced several crises and periods of economic turmoil that had a significant impact on the global economy.
Here is a short simplyfied overview of the major crises that occurred during these periods:
Global Financial Crisis (2007-2009):
The global financial crisis was triggered by the subprime mortgage crisis in the United States and quickly spread around the world, causing a severe economic recession.
Banks suffered heavy losses on toxic real estate loans and other complex financial instruments, leading to bankruptcies and government bailouts.
Investors suffered significant losses in stock markets, with stock exchanges experiencing dramatic crashes.
Governments around the world introduced fiscal and monetary stimulus policies to support the economy and safeguard the financial system.
Eurozone crisis (2010-2012):
The sovereign debt crisis affected several eurozone countries, including Greece, Portugal, Ireland, Spain and Italy, due to high debt maturities, low economic growth and structural problems.
Concern about the risk of default by indebted countries has caused turbulence in financial markets, with increases in government bond yields and instability in the banking system.
The eurozone crisis led to political tensions and negotiations over financial rescue programs between member countries and institutions such as the European Central Bank and the International Monetary Fund.
Oil crisis (2014-2016):
The collapse in oil prices was caused by oversupply in the global market combined with weak demand due to slower economic growth in China and other emerging economies.
Oil prices collapsed from over $100 per barrel to less than $30 per barrel, causing severe difficulties for oil-producing countries and energy companies.
Falling oil prices have negatively impacted stock markets and economies dependent on oil exports, while benefiting consumers and energy-intensive industries.
COVID-19 pandemic (2020):
The COVID-19 pandemic has caused an unprecedented global health crisis, with millions of people infected and tens of millions of deaths worldwide.
The lockdown and social distancing measures taken to contain the spread of the virus have had a devastating impact on the global economy, causing businesses to close, jobs to be lost, and supply and demand to collapse.
Financial markets experienced sharp declines due to economic uncertainty and concerns about recession, with the worst trading day since the 1987 market crash.
Ukraine (2022):
The war in Ukraine has posed significant implications for financial and global markets.
The instability created within Europe and the uncertainty caused by the conflict have generated volatility in stock, currencies, and in commodity markets.
Geopolitical tensions have heavily affected commodity prices, especially oil and natural gas, as Ukraine has been a key corridor for energy transport in Europe for more than 20 years.
This has also hurt the economies of Europe and EU countries by curbing economic growth and increased risks for investors.
Inflation has done the rest.
What would have been the best performing stocks to buy if we had followed the listed strategies ?
Technology:
Stocks of large technology companies such as Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL), Amazon (AMZN), and Facebook (FB), which experienced significant growth during this period due to technological innovation and revenue growth.
Health:
Shares of health care companies such as Johnson & Johnson (JNJ), Pfizer (PFE), Merck (MRK), and UnitedHealth Group (UNH), which have benefited from growing demand for pharmaceuticals and health care services.
Finance:
Stocks of large banks and financial institutions such as JPMorgan Chase (JPM), Bank of America (BAC), Goldman Sachs (GS) and Visa (V), which have recovered after the 2008 financial crisis and benefited from rising interest rates and economic growth.
Consumer:
Stocks of consumer goods companies such as Procter & Gamble (PG), Coca-Cola (KO), Walmart (WMT), and McDonald’s (MCD), which have maintained stability during periods of economic uncertainty and benefited from growing demand for consumer staples.
Conclusion
Financial markets face various crises.
These events cause turbulence in stock, bond and commodity markets, affecting investments and the global economy.
Investors must therefore adopt very careful risk management strategies and adjust their investment portfolios based on events to cope with uncertainties.
However, in the long run, markets have consistently shown us great resilience, reacting to events and resuming growth.