In today’s Exponential Investor:

  • The basics of setting up an investment portfolio
  • Never invest in a company that can’t explain what it does
  • Why your career can help you buy shares

“You’ll never forget your first crash,”a former colleague and experienced trader told me back in 2008.

I’d only been in the markets for a couple of years back then.

Every morning, we’d walk in, assess the news from the night before, then start placing friendly bets and how low a certain market index might fall, what the bottom of the market would be… or which stock would be the day’s biggest loser.

Tick by tick, our screens flashed red for days on end.

My colleague was right, I’ve never forgotten it.

And now there’s a bunch of new kids who are experiencing their first major market sell-off.

Gen Z, welcome to your first bear market.

You’ve made your easy money, now it’s time to learn to invest, not speculate.

Don’t let falling markets stop you

Bull markets are easy to make money in. You’re just riding a money wave.

Bear markets, however, are where you learn to pick stocks. Do some research and analysis. Take your time investigating your mate’s hot tip.

The problem with starting your investing journey in a bull market is that, when everything goes to pot, it can take some time to convince yourself to start up again.

Sometimes, losing money is the best lesson an investor gets. Don’t get me wrong, losing money hurts, but it should only leave a bruise. Meaning that a bear market allows you to sit back and work out what you want your investments to look like in the future.

So, today, let’s take advantage of that.

While stocks and crypto are taking a hit, let’s start with some of the basics.

How to set up a portfolio

The first thing to note is that a stock-heavy portfolio isn’t a balanced one, regardless of how well spread out the stock investments are.

While investing in shares is a great way to start growing your wealth, there are plenty of other investment ideas that can help you enhance it too.

In fact, consider spreading your cash out like this…

  • 50% in stocks
  • 10–20% in gold and silver bullion/cryptocurrency, or an even mix of both depending on your risk tolerance
  • 10–20% in cash
  • 10% in bonds
  • 10% in “fun money”.

Of course, the above is a guide to get you started. Remember that it won’t always be a neat spilt, as markets are constantly moving. But laying this framework down helps you create a plan as you start looking for opportunities.

Plus, this guide can help keep your enthusiasm for investing in check, making sure don’t let your portfolio go too hard to one investment.

Now, let’s break this down.

How do you go about picking stocks? Well, you might know more than you realise…

Keep it simple

Picking stocks is the most daunting part for investors. It doesn’t need to be though; you just have to move past the financial jargon.

The best rule when you’re starting out is to stick with what you know.

When it comes to buying and selling shares, most analysts will suggest you trawl through company financials and market updates. That’s a great method for people who already understand the stock market.

But not everyone enjoys reading those sorts of things. And, sometimes, going through pages and pages of numbers puts you off.

I do that for a living, and there are times when I want to pull my hair out. Financial reports aren’t fun.

If you’re going to stick at it, investing for yourself on your own should be enjoyable, not a chore.

The first thing you need to do is pick a business you understand.

Here’s a simple rule to live by when it comes to selecting stocks: if a company can’t explain what it does in ten words or less, ditch it.

This approach has rarely failed me. Complicated businesses spend more time talking to the market than doing the things they claim to do.

Not only that, with their interests scattered in multiple directions, they can’t focus on what the core of their business is.

A conglomerate such as Unilever Plc (LON:ULVR) has many businesses, yet can explain its activities in simple terms.

You know more than you realise

Step one: rule out any complicated businesses.

Step two: pick stocks based on what you know.

Many years ago, I received an email from a woman explaining that she had bought shares in Ansell Ltd. (ASX:ANN), a manufacturer of industrial and medical gloves, based on her global experience as a nurse.

She told me that she had travelled the world working in every type of hospital you can imagine. Top US private hospitals through to third-world, and makeshift medical sites in third-world countries.

Through all her years of working, she said every single hospital she worked at had a box of Ansell medical gloves. She took this knowledge and began going through Ansell’s financial background before taking the plunge and buying shares.

Remember, you might not be a professional investor, but you can apply your profession to investing.

Over the years, I’ve heard stories like this from other investors doing something similar.

Fly-in, fly-out mine workers in Australia (our mines aren’t close to major cities) have bought shares in mine-recruitment companies when they’ve seen a shortage in the market. Other mine workers, for example, have bought shares in businesses that provide remote power generators and other plant and equipment.

Take advantage of your own knowledge.

You might not feel like you understand the stock market, but chances are you understand your industry.

Do your homework

Next up is a little due diligence.

You actually don’t need to get too bogged down in the financial details of the companies you’re considering investing in.

Look to see if a company is profitable against how much debt it has. Is the company’s net income slowly increasing?

If so, chances are the company is still growing. This means the share price should go higher as the profits grow.

Both Google Finance and Yahoo Finance provide free basic financial data. And chances are your stock broking platform will have this information too.

And, over time, the more research you do, the less intimating the jargon will be.

Casting a wider net

Once you’ve bought a few shares and become comfortable with the process, you can start to widen your investment scope.

The London Stock Exchange, or LSE, has almost 2,000 listed stocks, and you don’t need to stick to the Top 50 companies, either.

Don’t just focus on capital growth – the shares going up in value – look for companies that will provide you with some sort of income. Blue-chip firms can useful here, as many pay a dividend.

Outside the Top 100 or 200 LSE-listed stocks is where your career knowledge could be useful.

And here you can spread the rest of “stock money” into mid-size and smaller companies.

The point is to take advantage of your own intrinsic knowledge and apply that to the stock market.

Stay tuned for next week, where we’ll go over how your fill out the rest of your portfolio.

Until then,

Shae Russell
Co-editor, Exponential Investor