By James Woolley
A lot of stock market investors invest in a large number of different stocks because they have always been told that they should have a well-diversified portfolio. However there are a small minority of people who like to invest in just one or two stocks at any one time. So for those people, let me discuss some of the factors that you should consider.
If this is your preferred strategy, then you clearly need to spend a great deal of time choosing exactly the right stocks. If your entire portfolio consists of shares in just one or two stocks, then you could potentially lose a lot of money if you make the wrong choices.
So first of all I would recommend that you automatically exclude small-cap stocks, and instead focus on mid or large-cap stocks. I personally would only consider a few very large market-leading companies from amongst the large-cap stocks, but there are some great companies amongst the mid-cap stocks as well.
The point is that you want to eliminate as much risk as possible, which is why you should exclude small-cap stocks. Therefore you want to find some big name companies that are likely to be at the forefront of their respective industries for many years to come.
This means that you want to find companies that have long records of growth going back many years. More importantly, you want to do some thorough research to make sure that this growth is likely to continue in the future as well. So you basically want earnings growth and dividend growth.
Dividends are very important for this type of investment strategy because they can make a huge difference to your overall profits. If you only invest in one or two shares, then you not only want long-term share price appreciation, but you ideally want some healthy dividends as well. You can of course bank these dividends, but you are much better off ploughing these dividends back into your chosen shares to get the full effect of compounding growth.
Finally if you have income coming in from elsewhere, you could consider adding to your holdings whenever the share price is temporarily oversold. For example when the RSI and stochastic indicators are both below 30 on your price chart. This will again add to your long-term profits if the companies in question continue to increase their profits every year.
The point is that despite being frowned upon by some people, it is not actually a bad strategy to invest in just one or two stocks. If you pick good quality companies that you know inside out, and that you know will continue to grow in future years, then you can make some substantial long-term gains.
About the Author
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