Are you hunting high and low for how to build a stock portfolio with little money and become a millionaire?
Let me tell you this is much easier than your assumption.
In fact, when you leverage the right strategies to pick fundamentally strong companies that are available at an attractive valuation and exercise patience during market upheavals, then you will build a stock portfolio that is worth millions.
If you have included a bunch of quality stocks after detailed research, you have done almost 90% of work to become a stock market millionaire. The 10% remaining work is to stick to the long term.
Don’t waste your time to calculate the best time in the stock market. Try to plan for the long term horizon. Ups and downs are the inherent scenarios of the stock market. In the long-run stock market deliver a whopping return. So you need not worry about returns. Instead, run independent research to pick the best stocks that will yield the best returns in the long run.
Why Long term?
The stock market is a voting machine in the short run, but a weighing machine, in the long run. You need to start investing early even when you have only $100 to invest.
Focus on the following graph.
When you are starting with $150 a month and increase 10% of the investment for the next 30 years, your portfolio’s worth will be a whopping $1 Million assuming a 12% CAGR.
How to Build a Stock Portfolio with Little Money
Do you have a dream where you want to enjoy your vacation, or where you want to live after retirement, or which car you want to ride?
To live your dream life, you need to work out the right strategy that will help you to reach that desired corpus.
Here is the 7 step process to build a stock portfolio.
- Step #1. Create an emergency fund.
- Step #2. Read best investing books to get insights into investing.
- Step #3. Pick a stock after running independent research.
- Step #4. Diversify your stock portfolio.
- Step #5. Open a Demat cum trading account.
- Step #6. Track your portfolio at a regular interval.
- Step #7. Stay invested for the long run.
Step #1. Prepare an emergency fund
To navigate the unexpected financial expenses namely loss of a job, unforeseen medical expenses, renovation of home, or repairing the existing car, you must prepare an emergency fund to stay away from high-interest personal loans or credit card loans.
Your emergency fund must have at least 6 months of living expenses including household expenses, insurance premium, and even the Amazon Prime subscription charges, etc.
The first step to create an emergency fund is to figure out what is your household income each month. Suppose, you have a household expense of $5000, then try to set aside at least $3000 in the first month, then regularly set aside $3000 each month until you have a balance of $30000 in your savings account.
Step #2. Read best investing books to get insights into investing
When its’ time to start investing to create a fund that will help you to achieve a worry-free retirement life, or buy a high-ticket item such as a house, you should acquire inside-out knowledge to pick the best stocks.
Here I have outlined the 7 best books you should read before you start investing in the stock market.
The Intelligent Investor by Benjamin Graham
This book is written by Benjamin Graham, the father of value investing. Here are the key points that you will learn by reading this book.
- Who is Mr. Market and how Mr. Market plays with the emotions of the retail investors?
- The difference between a Defensive investor and an Enterprising investor.
- A margin of safety and how to calculate the margin of safety.
- The difference between investing and speculating.
As an intelligent investor, you should not be worried about short-term market turmoil. Instead, analyze a company by checking key parameters namely management, earnings, valuations to get safe and steady returns in the long run.
Common Stocks and Uncommon Profits by Philip A. Fisher
By reading this book you will get a detailed snapshot of what to buy, when to buy, when to sell a stock, and how to find a growth stock that will yield the best returns. The author has described 15 points you should look at before investing in common stocks and 10 don’ts when you are investing in the stock market.
The author describes the different factors to take into consideration like the future growth prospect of a company, whether the company is making emphasis on research and development of new products or improve the existing products, the management of the company, etc. when you are investing in any company with a long term horizon. Try to find a suitable company and don’t wait for a correction. You should rather buy it now and stick to it for the long run.
Finally, the author advises a retail investor no to diversify a portfolio to 25 stocks. The over-diversification makes it harder for regular assessment of its performance.
One Up on Wall Street by John Rothchild and Peter Lynch
Mutual fund superstar who had delivered a 29% CAGR for a period of 1977 to 1990, Peter Lynch outlines the following factors that you should consider before investing.
- Should I invest in the stock market or first to buy a house?
- What amount should I invest in the stock market?
- How can I pick winning stocks that will yield the best returns in the long run?
- Should I follow the expert’s advice?
- When shall I sell a stock that I included earlier in the stock portfolio?
The Little Book That Beats the Market by Joel Greenblatt
The author has given the magic formula by applying which he has generated an annualized return of 40% for the two decades. You will get surprised that the author makes use of two factors namely Earnings Yield and Return on Capital to pick quality stocks that have delivered a whopping return in the long run.
The Little Book of Value Investing by Christopher H. Browne
The author of the book has given a detailed snapshot of,
When should you invest in the stock market? Just like shopping, buy stocks when they are on sale and available at an attractive valuation.
How to calculate the intrinsic value of a stock? The author makes use of the Price to Book ratio, Price to Earnings ratio to calculate the intrinsic value of a company.
When is the best time to own a stock? Simply put, when the insiders of the company buy the shares the chances are higher that they believe the prices will surge in the long run when the company delivers robust earnings.
In which businesses should you invest? Invest in those simple businesses that will be present even after 50 years or more.
Should I invest in global equities? Invest in developed markets rather than emerging ones.
Finally, the author has advised that you should avoid timing the market, instead stay invested for the long run.
A Beginner’s Guide to the Stock Market: Everything You Need to Start Making Money Today by Matthew Kratter
The author believes that the stock market is the best moneymaking machine ever created and everyone in this world should start investing in the stock market, not only the rich and the privileged. By reading this book a retail investor can learn how to prepare an investment strategy to pick the best stocks that will yield the best returns. The author also focuses on what mistakes you should avoid before a journey in the stock market. Additionally, the author outlines how to pick the best stockbroker to kick start in the world of investing.
Beating the Street by Peter Lynch
When you are good at solving 7th grade maths, then the chances are higher that you will be able to pick the best stocks. In this investment classic, the author outlines the 21 principles of investment and 25 golden rules of investing that will help you to find companies that are available at an attractive valuation and have the capacity to deliver the best plausible returns.
Step #3. Pick a stock after running independent research
There are 2400+ stocks listed on the New York Stock Exchange. The question is how to find a few stocks that worth buying and include in your stock portfolio.
Here are the 7 parameters you should consider before including a stock in your stock portfolio.
Parameter #1. Debt to Equity Ratio
When you are investigating how much leverage a company uses, you will find the Debt to Equity ratio a useful matrix. By dividing the total liabilities a company has with its total shareholders’ equity, you will find the debt to equity ratio.
By calculating the debt to equity ratio, you can gauge whether the company delivers robust earnings growth by pumping the external capital or not. A higher debt to equity ratio indicates that the company’s share price will plummet when the cost of the debt financing surpasses the growth numbers or the company deteriorates earnings during a business cycle.
As a good rule of thumb, stay clear from those companies that have a debt to equity ratio of 2 or above. It’s worth investing where the debt to equity ratio is 0 or below 0.25.
Parameter #2. Profit Margin
Profit margin helps a retail investor to gauge how much profit is generated by a company for each dollar of sale by running a business operation. For example, a profit margin of 12% indicates that the company had a net income of $0.12 for each dollar of sales.
By analyzing the profit margin you can access the management’s efficiency whether the company is able to generate profit from the sales generated by running a business operation.
It’s worth including in your stock portfolio that has delivered a double-digit profit margin for the past 3 years.
Parameter #3. Earnings per Share
When you divide the company’s net profit for a financial year with its total common shares outstanding, the result is Earnings per share.
The higher the EPS of the company is, the more lucrative the investment opportunity is.
A higher EPS signals that the investors are willing to pay a higher price to own a company’s common shares.
Parameter #4. Dividend Payout
You want to create a passive income. So, you must include those stocks that have historically declared a regular dividend.
To pick a dividend stock you should take a close look at dividend yield. The dividend yield reveals how much a company pays out as a dividend in a financial year relative to its per-share price.
If the dividend payout and share price are in line then invest in that company that has steadily increased the dividend payout year on year.
Parameter #5. Return on Equity
The Return on Equity derives by dividing the net profit of a financial year with its total shareholders’ equity.
You should avoid those companies that fail to deliver a double-digit ROE irrespective of in which sector the company operates.
Parameter #6. Price to Earnings Ratio
The price to earnings ratio is calculated by dividing a common share’s market price to its per-share earnings a financial year.
Price to Earnings ratio helps you to calculate how many years it will take to earn back your initial investment. In case, you have bought a share when the company’s current P/E is 25, then it will take 25 years to earn back your initial investment through the company’s future profits.
As the price to earnings ratio varies from sectors to sectors, you should include the two companies that are operating in the same industry or sector to calculate which stock is undervalued and deemed fit for investing in it.
Parameter #7. Price to Book Ratio
The price to book ratio is calculated by dividing a common share’s market price to its book value per share.
The book value reveals what an investor will get in the scenario of the company liquidates all of its assets and pays back its outstanding debts.
A company that has a P/B ratio less than 1 is considered undervalued. But value investors are in a witch hunt for those companies that have a P/B ratio between 1 and 3.
Step #4. Diversify your stock portfolio
No matter what kind of investor you are, a value investor or a growth investor. Don’t invest all of your capital in one stock. Instead diversify your investment capital across various sectors namely Airlines, Banking, Financials, Consumer Durables, etc. to minimize the risk potential.
When you are looking for a steady cashflow via dividend by including mature blue-chip stocks in your stock portfolio, it’s not a wise decision to invest all of your capital into blue-chip stocks of any specific sector or industry.
By diversifying your stock portfolio across different sectors or industries, you ensure that your stock portfolio will not experience an intense hit contrary to when you include only one sector’s stocks.
Let’s assume you have included airline stocks in your portfolio. There is a possibility that any bad news or pilot strike for an indefinite period will lead to a sharp market correction of Airline stocks. Consequently, airline stocks in your portfolio will correct significantly.
But if you exercise diversification by including the railway stocks, auto stocks, in your stock portfolio, your stock portfolio won’t face an intense hit. In this situation, the auto stocks or railway stocks will give a steady return, since the passengers will resort to an alternate mode of transportation.
Step #5. Open a Demat cum trading account
When you have picked an ample number of stocks across various sectors and want to invest in the stock market, it’s time to pick a stockbroker and get started.
To pick the best stockbroker, just find the answer to the following 7 questions.
What commission is charged when you buy individual stocks, options and futures, mutual funds, Exchange-traded funds, and bonds? TD Ameritrade, E-Trade, Ally Invest don’t charge a commission to buy and sell individual stocks.
What minimum amount in the account is required to open a brokerage account? TD Ameritrade, Ally Invest offer brokerage account with no minimum account.
Is the stockbroker offering two-factor authentication to protect my account from fraud? You can enable 2-factor authentication when you pick Ally Invest to secure the account either by adding a personal security question or by including fingerprints, retinal scans, and facial recognition.
What investment solutions does the trading platform offer? Ally Invest and TD Ameritrade allow a retail investor to trade shares, IPOs, Bonds, Mutual funds, and ETFs.
Is the trading platform easy to navigate? When you visit Ally Invest or TD Ameritrade you will find blog posts, videos, podcasts, and a trading platform to buy or sell securities.
What amount of money can you deposit in your brokerage account? Ally Invest allows a retail investor to move up to $250,000 a day from bank account to brokerage account and vice versa.
Does the stockbroker have excellent customer assistance? Ally Invest has a team of brokers who can assist you to execute trades or can give a suitable answer to your queries.
Step #6. Track your portfolio at a regular interval
It’s exciting to witness growth after picking a stock for the long-term horizon. Are you in search of budgeting tools that will track your investment and offer the best plausible investment advice too?
Personal Capital is a free budgeting tool that you can make use of free of cost to track your investments.
Personal Capital offers an investor to track his investment by creating charts and graphs. Personal Capital monitors not only your investment portfolio but also your utility bills paid in a month. In this way, you will get a detailed snapshot of where your earnings go that you have made by blood, sweat, and tears.
This tool gives an insight into the mutual fund expense ratio where you have invested your hard-earned money to lead a worry-free retirement life. By utilizing the “Investment Checkup” feature this app will gauge your risk profile and find a suitable asset allocation strategy that is deemed fit in accordance with your time horizon and risk appetite.
Step #7. Stay invested for the long run
It’s a proven fact that the stock market becomes a voting machine in the short run, but is a weighing machine when you stick to the long term. You may get surprised that the S&P delivered a 9.5% return per year during the 87-years of the period between 1928 and 2015.
Apart from that stocks can drop between 10% and 20% over a few trading sessions. The corrections are the best opportunity to accumulate the stocks at much cheaper rates if its fundamentals are intact.
Congratulations! You have done hard work to achieve financial inclusion.
When you follow the steps that I have mentioned above, you will definitely achieve your long term goals, be it a happy retirement or purchase of your own house.
I have delivered all the practicable tips that helped me and my spouse to achieve success in the world of investing.
Frequently Asked Questions regarding how to make a good portfolio of stocks
How to prepare an ideal asset allocation?
To prepare a balanced portfolio first you need to consider the goals and time horizon.
An unmarried 25 years old have a different investment strategy as compared to a 50-year-old married guy who is looking forward to financing a child’s 4-year graduation program and retire within 10 years.
As a rule of thumb, when you are 25 years old then you can invest a maximum of 75% of your available funds into equities, since you can stay invested for the long run. On the contrary when you are 50 years or older, then you should invest a lion’s share into bonds and government securities.
Should I clear the debt first or start investing?
Take a pen and put all the high-interest debts in black and white. When the interest payments play havoc, it’s a good idea to clear all the debts and then start investing in the stock market.
What mistakes should I avoid while investing in the stock market?
Here are the 5 mistakes that a retail investor makes when it’s time to start investing in the stock market.
Start investing as per the recommendation via SMS or email
At the time of investing in the stock market don’t rely on research reports or multibagger stock recommendations that you have got on your smartphone either via SMS or mail. Instead, run independent research and pick a stock after analyzing of 7 factors that have been discussed earlier.
Following the herd
When a retail investor finds that the relative or the colleague has made a lot of money by investing in any stock, he gets tempted and invests accordingly. For god sake don’t make this mistake. Simply put, you don’t know their time horizon and risk appetite. So, don’t stay invested. Instead, prepare a strategy and stick to it.
Get married to a company
Don’t fall in love with a company especially when the company is delivering deteriorating earnings year on year. Don’t forget, you have invested in that company that will multiply your investment and help you to achieve your financial goal.
Lack of Patience
If you are investing in the stock market solely because you have a hope that a company will multiply 10x times your initial investment, then stay away from investing in the stock market. When you are expecting a realistic 12% CAGR for a period of 30 years then you should invest in the stock market.
Start investing in the stock market without a goal
When you have set up a goal then it is much easier to achieve it. But when it’s time to start investing in the stock market retail investors forgot to prepare a goal and invest accordingly. You are planning to invest for your retirement which is 30 years away. This is a case and it will be different from the case where you are planning to buy a car within the next 5 years.
If you can stay invested for the long run then the stock market is the best money-making machine ever invented. But if you want to invest your money to buy a car or finance your child’s education within the next 5 years, then choose Bonds and Government Securities.
Hope this article has helped you to dearth how to build your stock portfolio from scratch that will yield the best return in the long run. If still have a question regarding how to make a stock portfolio for retirement, make a comment so that we can have a discussion.