Trading Shares Can Be Financially Rewarding

With the Australian share market booming, people are now more confident than ever about investing in shares, but are they really constructing a winning portfolio?

Constructing a portfolio of shares is often hit and miss for the average investor, but this needn’t be the case if you understand proper portfolio construction. Unfortunately, a lot of investors tend to rely on recommendations from newspapers, magazines, friends and taxi drivers. However, most investors usually only have a small amount of money to invest; so let me say that this is not the way to select stocks if you want to consistently profit as these methods are both inconsistent and ineffective.

Selecting the right shares and managing your portfolio correctly is critical to your success in the share market. I would argue that everyday Australians can invest directly in shares and create a portfolio that consistently outperforms.

The list of stocks you select for your portfolio will depend on the time you have  vailable, your resources and your goal. That said I recommend that individuals don’t stray too far outside the top 150 shares on the Australian market because they only need to hold between eight and 12 shares to achieve superior market returns. Sticking to the top 150
means there will always be plenty of choice.

There are six reasons why only the top 150 stocks should be selected:

• shares are liquid, even if the market falls heavily
• the companies are generally very profitable businesses with the best management
• these stocks are traded heavily by the institutions, therefore they are less likely to be affected by panic selling
• the companies generally pay good dividends
• reliable information about these stocks is much easier to obtain
• the chances of any one of these companies going broke is very small.

Managing risk

Venturing outside of the top 150 stocks will not only increase your risk level but the knowledge you require to successfully manage the risk will be greater. Unfortunately many newcomers to the share market mistakenly believe that the top 150 stocks are too expensive and that buying cheap, speculative stocks will yield higher returns. When you buy cheap stocks, however, you are gambling with your money and taking higher risks, speculating that a cheap stock will perform better than a solid blue chip stock. But more often than not this just results in losses and very average returns at best.

However, if you take this low risk approach to investing over the medium to long-term then nine times out of ten, you will achieve far higher returns than if you try and beat the market by picking the next boom stock. Given this, it is possible for individuals to successfully manage their own portfolio using proven techniques that yield very profitable returns. Indeed, by adhering to a simple set of rules, the average investor will be able to outperform the market year in year out.

The question that remains is do you want to take control of your investments? Only you can answer that, but if you are willing to spend at least one hour a week educating yourself, you will be in a much better position to make informed decisions. And with the right knowledge you will be able to invest safely and confidently in the share market.

Controlling your own investments has never been so easy or so profitable.

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