How to Create a Stock Portfolio

stocks, bonds, ETFs, straight out of downtown Chicago. This is Zach's Market Edge. Welcome to Zach's Market Edge, the podcast about investing in your life. I'm your host, Tracy Reinick.

And I'm going solo again this week to talk about how to create a stock portfolio. We are going back to the basics because everybody has to start somewhere. And I know many of you are new investors, and you're asking, what should I do? What should I buy?

How do I create a stock portfolio? So first, a purely all-stock portfolio should have between 10 and 20 stacks. And so I'm not talking about one that also includes ETFs, although I'm going to talk about ETFs on this podcast as well, because I think they're a good addition to a stock portfolio. But this is just individual stocks.

If you want to set up a portfolio like that, which, of course, we all like it. It's all fun to have a total stock portfolio. It should, again, have between 10 and 20 stacks. So you don't really need a super huge portfolio to get diversity.

They've done a lot of studies on this. And they've shown, if you have up to 20, that you can still have diversity in your portfolio with as little as 20 stacks. But some big-time investors have a lot more. So I took a look to see what's in Warren Buffett's Berkshire Hathaway right now.

I think he used to have like 52, 53 holdings. And right now, he's back down to 48, because he has sold out a few things, and he hasn't added as many back in. So he's down to 48. But that's a lot.

That's hard to manage. 48 different stocks. And to keep track of what each company is doing, and just basically what they're doing. That's a lot of conference calls to listen in on, and check in on every quarter, and know what's going on, and why you bought it in the first place.

So that's a little bit hard to do. I don't recommend having 48 stacks if you're just a normal investor as I am. 48 is a lot. That's why the 10 to 20 is a much better and manageable amount.

And again, you can still get the diversity if you're a little closer to the 20 level, and you can keep track of everything. Now, I think I also heard that Cathy Wood at ARK investments with her ETFs. Some of those are like 35 to 50 companies, but she has a staff. She has analysts who are covering a certain number of each of those companies.

So that's how she makes that manageable. She's not doing it all. So keep that in mind as well. So I have at least 10 to 20 stocks in this portfolio.

And then you have to ask, what are your goals for this portfolio? What are you investing? I know that sounds kind of boring, because a lot of you just are investing for fun, or you want to get rich, or whatever it is. Those are goals.

All of that is goals too, but know why you're doing it. So for instance, I have a friend who's investing to buy a vacation home in about 10 years. So he's buying a lot of stocks with dividends, big cap companies that are a little more stable, because he has a pretty considerable amount of time period. And so he was sharing with me a couple of the stocks that he was buying in there.

So he's buying some of the cheap stocks that are a little bit out of favor, so a little bit more on the value investing side with a 10 year time horizon. So he bought some Walgreens Boots, WPA's the ticker there. I took a look. It has a dividend right now yielding 3.8%.

And it's trading with a P of 10.2. It is a ZAC's number three hold right now. It's had its problems if you go look at the chart, but he's dollar cost averaging into it right now. So every month he's putting a little bit of money in, into his portfolio and distributing it among several stocks.

So one of those is Walgreens Boots. Then another one he told me about was Johnson and Johnson. That's always been a staple in healthcare side for years, decades, really. And now they're in on the coronavirus vaccine.

So that's a big draw there too. J and J is their ticker. I took a look there. Their P is a little bit pricier right now, 17.2, but that's not horrible.

And they pay the dividend as well, yielding 2.5%. There is ZAC's number two buy. So they got the rank of a two, which is a buy. So again, as a longer term investor with a longer time horizon, you don't really have to be a genius.

You can buy just kind of these big cap stable stocks. He didn't tell me if he has any small caps in there, nothing wrong with getting a variety of all the caps. That's what I try to do in my individual stock portfolios. And you may have more than one portfolio.

It may not seem possible right now if you're just starting out, but you may have kind of a trading account type of portfolio where you kind of buy the fun ones that you're just looking to be in and out of quickly. Then you may have an IRA, which is for your retirement. So that's a much longer time horizon. Or you may be like my friend who does not have a trading account, but he does have a longer time horizon account.

That's not an IRA that he's just investing in the two buys vacation home. So keep that in mind too, you may have more than one portfolio. And that's OK. Now, if you want some of the aggressive growth type of stocks, you can add some of the things individually.

But I know this is where a lot of you have issues. You can buy fractional shares on a lot of the platforms now. So if it's something like Amazon, which is trading over $3,000 per share, I mean, how many of us have even $3,000 to buy one share of it? Not many.

So you could do the fractional shares and do it every month and build up to that one share. Or this is where ETFs do come into play. And I know many of you who want just a stock portfolio don't find it as exciting to buy ETFs. But a lot of the ETFs kind of changed in recent years.

And some of them are actively managed and some are not, but are still filled with things you want to be buying. So it does make it an easier way to get diversity and exposure to some of these stocks, like the things or a lot of the hot financials or the software, cyber security, the AI stocks, all of these areas, especially in technology. So one of the easiest ways you can add to your portfolio, all of this kind of aggressive technology is through one of the basic ETFs. So one of the easiest ways is really the technology select sector spider fund.

And this is the one that's mentioned all the time on TV, in financial media, just everywhere, because it's been around since 1998. So it's been around a long time. And the ticker is XLK. And I took a look at the biggest holdings.

So if you wanted to own Apple and Microsoft, for instance, but you don't have enough money to buy the individual shares or you could buy one, but not the other or that kind of thing, you want to just be in both of them right now. This fund is Apple and Microsoft are the two biggest holdings. So AAPL and MSFT. And Apple is 21% of this ETF.

So that's a pretty big chunk right there that you're owning if you buy this ETF. Microsoft is 20.1% of this ETF. So combined, they are 40% of this ETF. So that's an easy way to get exposure to these two.

Of course, it also increases your risk a bit, but if you can't afford to buy both of them and you want to own both of them, then this is a way to get it. Now, it took a look further down the list in videos number three, but it drops all the way down to 4%. And then you have Visa at 4%, PayPal at 3.6, and MasterCard at 3.4. And so it drops down pretty fast.

And then you're starting to get a lot of these kind of financial tech companies in there, which is interesting because you might not think if you owned a tech fund that you'd get Visa, PayPal, and MasterCard on a row there. So this fund has 76 holdings. That's a lot. Average P is 27.6 right now, and the expense ratio is 0.12.

So a little bit higher on the expense ratios for this one because it's been around a long time and they charge more for some of those older ones before everybody got into the super cheap ETFs. But this is a way, again, you can use this as one of your 10 to 20 holdings and you get the broad exposure to this list of companies right off of that. Another one you might want to consider is the Invesco ETFs, but they have a new one that has a lower expense ratio. It's QQ, M, and this one has expense ratio of 0.15.

So similar holdings to the QQ, but this one was invented for those who want to just buy in and hold for a long time with the lower expense ratio, but it's still 0.15. Not as cheap as some of the Vanguard ones and whatnot that you can find elsewhere. But I took a look at the holdings in this one. And yes, it's very different from what we just described, except Apple and Microsoft are still the two biggest holdings.

Apple at 11.4% and Microsoft at 9.4%. So essentially you're getting about 21% in those two companies. But then you're going to get Amazon at 8.5, Tesla at 4.4, Alphabet with the GOOG ticker at 3.6, Facebook at 3.3, then the other Google ticker at 3.3, Nvidia is on this one too at 2.9, PayPal again at 2.6, and then Intel at 2%. So you can see you're getting a little bit different exposure to the tech area and including social media here and the advertising side, Amazon with AWS, but you're going to get some retail in there with Amazon obviously.

So this is a little bit different mix. Keep that in mind too when you're looking to add some of these ETFs to diversify. But what else can you do if you're just kind of out there and you're starting and you're wondering what should I buy outside of these ETFs? Well, you basically know what you use, right?

This is the old kind of investing strategy from the 1980s and 90s to buy what you know. It was kind of started by Peter Lynch who was a big time portfolio manager back in the 80s and 90s at Fidelity. He ran the Magellan Fund which just launched as an ETF actually. To now get that as an ETF has a total new management.

He retired way back in the 90s so he's no longer there. But his strategy was to pay attention to where his wife was shopping, where he was getting his haircut, what stores he was going in and how much he loved going into Home Depot and places like that. And then he would go and research the companies. Does it have good management?

What am I paying to buy this? What's its strategy to grow? What do earnings look like? All of that.

And then he would buy into some of these. And one of his beliefs always was with say the retail or the restaurant side of things was that it takes a while many, many years to actually expand across say just the United States. Not even mentioning internationally. Now these were brick and mortar stores because this is the 1980s and the 90s.

But he talked a lot about how long it would take Home Depot to be in every major metropolitan market in the US because this is the 1980s. And it wasn't even close to expanding like that yet. But now that we have online, it's a little bit easier and faster to expand popular brands quicker around the globe. But you still have a really long lag time when a company decides to expand like that.

Even online and all these companies are still expanding brick and mortar. It's not going away. It's going to be a combination of online plus brick and mortar. So you're still having expansion in that way.

So I encourage people to take a look at what companies they do like and what they are using. So what are those might be Chipotle? How many times are you going there? Are you signed up for their app now?

Are you using it? Are you getting rewards off that? So Chipotle, ticker, CMG, it's been one of the hottest stocks during the pandemic. It's up 51% in the last year.

But it has pulled back off the highs, which a lot of these hot stocks as I'm recording this on February 23rd, 2021. And it's now down 7% in the last month. It's forward piece, still 64.9, but it used to be at 70 times. So it's a little cheaper.

But no dividends with Chipotle. But if you can get it even a little cheaper than what it is right here, might want to put it on your watch list if you're a big fan. So this is the type of investing you can do to buy things that you know. Another one that I bought because I started going there was Lulu Lemon, ticker, L-U-L-U.

I was I was shopping for my niece constantly. And I love what products they have. I started listening to the conference calls. They were going into new categories and just a lot of opportunity there.

They're still expanding the brick and mortar. They're not they're not everywhere. You may think they are, but they're not. They were expanding to include restaurants within their stores before the pandemic hit.

So we'll see what happens afterwards if they're still going in that direction. This one also has been soaring. But over the last month, it's now down 9.4%, much like Chipotle. It's coming down off those highs.

PE is still 49.9, so basically 50 times. So it's not cheap. But this is also one that I bought over a year ago, two years ago, maybe now, because I started shopping there all the time and their business was exploding. So yes, you can do the buy what you know to buy into and start your portfolio.

But this is also why you need 10 to 20 stacks because you may get it wrong with buy what you know. Because just because you're shopping there doesn't mean everybody else's either. Right? So definitely do your research.

Look on the Zach.com to see what those earnings are looking like. Are they growing it? Are they growing the sales? Listen to the conference calls.

Okay. Also, no one says you can't dollar cost into some of these higher price stocks. So like a Lulu Lemon, it's trading, I think it's still over $300 a share. That's pricey.

For those of us who literally are putting in just like $100 a month into our portfolio. So you can do the fractional shares on some of these and you can dollar cost average into them. You don't need $5,000 or $10,000 out the gate to start a portfolio. You can just accumulate.

And I encourage people who are operating their own portfolios to set up and account your account to automatically deposit the money, take it out of your checking and put it in there. I've done $100. I've done the $200. Whatever your goal is per month.

Because remember, what is your goal for this? Have the plan and move it automatically. Now, I used to have there used to be a service that would automatically buy what I wanted them to buy every month as well. They would take my money out of my savings or checking account and then they would automatically buy it every month on the third and Tuesday of the month.

But they shut down that service. So now the money just goes in there. So you have to be alert that you do have to invest it at some point. Nothing wrong with letting some cash accumulate in there too, waiting for an opportunity, especially if there's a pullback going on and some stocks are getting cheaper to try to market time a little bit to buy in a little cheaper.

But you do ultimately have to take some action. So keep that in mind too that it's not going to invest for you automatically normally. And you will have to do your own actual trading in there. So a couple of other things to keep in mind.

Remember, diversity is important. We all love the tech stocks, but I don't recommend someone just owning the XLK ETF. And that is all. That is not diverse.

Even though there's 76 stocks within that ETF that is not diverse by industries. So eventually, tech will not be the hottest industry. I know it's hard to believe, right? Because it's been going for a while.

But some of those of us who've been investing for a number of decades remember the last time tech was this hot and then it was not. So you need diverse portfolios so that you can capture some of the hot areas in other sectors for when tech is not. So use the ETFs to gain access to stocks you couldn't otherwise, but don't just have one ETF either be diverse and spread it out. Have a couple of ETFs and then have some stocks, individual holdings in there so that you're getting the diversity of names.

Now, are you going to get 200% gain in a year in an ETF? Well, I know there's one of the gaming ETFs that's super hot and is up like 100% because of GameStop and some of the other stocks that were in that ETF. That is very rare. No, you're not going to get like the super huge gains because like the XLK, you're only 76 companies in there.

So even if you get one of them, that's up 200, 300%. All of them aren't going to be so the average is not going to be that high normally. But I took a look at the XLK. Let me find that again.

And I wanted to kind of see, oh, yes, here it is. What the average return was on there because tech has been hot and those other techy names and those financial type of tech names that are in there like the visas and all that. Those have been red hot too. So the five year return is 27.4% over the last five years annualized and after tax is 26.97%.

Now, I know some of you've gotten spoiled with the 100% returns we've seemingly seen over the last year in a lot of individual stocks, but that is rare as well. And getting 27.4% over a five year period is tremendous. And you will meet your investing goals most likely unless it's to be mega rich, I guess. But you will meet your investing goals if you can get 27.4% over five years or 10 years.

That is amazing. So past performance doesn't indicate the future as we know. Keep that in mind. But sometimes having the diversity in your portfolio works and you can get some good returns even by owning ETFs.

So again, if you're just starting out, keep in mind to have 10 to 20 stocks in there, be diverse, use ETFs to get some of your diversity, but have fun. The whole point of having a stock portfolio is to buy your favorite stocks. So if you're a huge fan of Elon Musk by the Tesla stock or add in infractional shares until you can get a share or two of it, buy in your favorite restaurant or retailer, buy in some travel stocks if travel is your thing and you're aware of which brands are good and who's on top in travel. That's the way to go.

That's what I like to do. And I try to keep it diverse, again, among different areas and try to get some dividends. Those are fun too, especially if you're investing in an IRA type of account where you don't have to pay the Cavodane's tax on it because it's in a retirement account. That's always fun to get the money into there and then you don't have to pay for it at least right now.

So let me recap some of the tickers I talked about because there were a lot of them in here. So my friend was buying some of these value type stocks, but they paid decent dividends because he has the 10 year time horizon. So one of the ones he's in is Walgreens. It's been out of favor, no doubt about it and it's cheap at 10 times.

WBA is the ticker there. Johnson and Johnson, it's got one of the vaccines among other things. J&J is the ticker there. That if you're buying kind of what you know, you might want to buy some hot restaurants.

Chipotle is one of them. CMG, they got that really good app and I've been using it. Lulu Lemon, I bought that because I've been going there and buying a lot of things. So Lulu, LU, LU, then some of the tech type of ETFs to get you some diversity that Spiger selects ETF, which is one of the oldest ones is XLK.

That's where you're basically going to own Apple and Microsoft. You're going to get those two biggies. It's 40% of that ETF. And then another one that a lot of people use to play just to get the fangs because you will get Amazon and Facebook and Google in this one is the triple Q's.

But with the M on the end, because those expense ratios are a little lower, QQQM as it may is the ticker for that one. But be sure again to have fun out there because it is fun to invest and to start your own stock portfolio. It's okay to start small. That's what I did back in the day.

One of the first I bought when I started my own individual portfolio was Microsoft back in 2000. Those were the days I actually still have some shares right now, but they are not my original shares. I did sell out of it by like 2005, I want to say, and then I did not get back into it until 2019. So I'm back in.

I don't know what that says, but it is fun to buy your own. So have fun out there. Be diverse. Try to get up to at least 20 different stocks.

It'll take some time, but you can do it. And again, have fun investing. So be sure to subscribe so you don't miss a single episode. I have some interesting episodes coming up.

I'm going to have John Blank back on again to talk about what's going on in the economy. Everything's happening with these bond rates. Are we getting inflation? Should I buy gold?

Like what's happening? I'm going to have him on and a bunch of other zacks guests. So who knows what interesting topics may be coming here in the spring of 2021, but I'm going to be covering it all. So be sure to subscribe.

We're on Apple Podcasts. We're on Spotify. You can get us on Amazon Music, but get us somewhere. And I'll see you again next week with some more stocks.

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