Two weeks ago, I wrote about 3 things every new investor must know. By the time you get to fool.com.au, however, chances are you already own some shares, and are starting a portfolio of your own. So the following article is for you.
Here are three simple things you can do to get a better handle on what you own:
- Break down your portfolio by industry
Some online portals like Commsec or Nabtrade provide charts for this purpose, you can look up a brief description of the company's operations in Google Finance, or make your own in a spreadsheet. Identify how much of your portfolio is in each industry like mining, banking (or lending), financial services, manufacturing, consumer essentials, healthcare, and so on.
Here is a sample portfolio consisting of five companies, Rio Tinto Limited (ASX: RIO), Telstra Corporation Ltd (ASX: TLS), Commonwealth Bank of Australia (ASX: CBA), Fortescue Metals Group Limited (ASX: FMG), and Woolworths Limited (ASX: WOW), displayed in Microsoft Excel:
By collapsing shares together by industry, we can quickly see how much of the current value of a portfolio is tied up in each industry. The goal is to spot possible warning signs before they occur. Even without knowing a lot about investing, you can generate a lot of questions for yourself by looking at this chart.
You might ask "am I comfortable having almost half of my investments in mining companies?" Or "Do I really need to own both Rio Tinto and Fortescue Metals?"
You can also use this data to guide your behaviour or factor in your own market predictions – for example, "I'd really like to own more healthcare or technology companies" or "I expect interest rates to rise over the next 18 months, how will this impact the ability of my bank's customers to repay their loans?"
- Calculate how much of it is making money (or paying dividends)
Here you want to look at what % of your portfolio in dollar terms is actually making a profit. The quickest way to do it is to look at the most recent annual report for each company and see whether it reported a profit, or an 'underlying' profit. For example was it profitable after you exclude one-off expenses that were incurred?
Again, the idea is to question yourself or identify possible warning signs – you've got to measure what you've got in order to know what you have. Not all unprofitable companies are made equal though, and there's a world of difference between XERO FPO NZX (ASX: XRO) and MMJ Phytotech Ltd (ASX: MMJ), even though both are unprofitable.
Still, if you find that 40% of your portfolio isn't making a profit or paying a dividend, you might be asking: "Am I OK with this state of affairs, and if so, why?" Unprofitable companies are more vulnerable to just about everything. The less financially secure you are, the fewer unprofitable companies you should own.
- Organise your companies by their potential
Peter Lynch explains this well in One Up On Wall Street, with categories like Stalwart, Cyclical, Asset Play, and so on – you can use these if you are familiar with them, or a variety of other categories that are out there.
For beginner investors, I would suggest just dividing your portfolio into two groups – growth (smaller companies with better likelihoods of growing profits rapidly) stocks and blue chips/ dividend stocks like CSL Limited (ASX: CSL).
Again, the idea is to compare what you have with your goals. If you're aiming for growth yet you have a portfolio full of mature businesses with limited room to expand – you won't get what you want.
Foolish takeaway
By breaking down your portfolio by industry, profitability, and potential, you can get a good grasp of your current investment portfolio and some of the risks without doing a whole lot of work – great for those just getting started in investing.
