I am often asked how to develop a winning portfolio of stocks from the Cabot Value and Cabot Enterprising Models. First, I highly recommend buying stocks from both models, and allocate no more than 75% of your portfolio to either Model. Second, buy equal dollar amounts of each stock you purchase, and commit less than 5% of your portfolio to each individual stock.
How many stocks should you buy? You want to diversify your portfolio, and not put all your eggs in one basket. Ideally, you should purchase 20 to 30 stocks. However, only buy the number of stocks that you can comfortably follow. Allocate 50% to 75% of your portfolio to Cabot Value Model stocks if you consider yourself a conservative investor, or allocate 50% to 75% of your portfolio to Cabot Enterprising Model stocks if you are more aggressive.
Diversify your portfolio by investing in at least five different sectors, for example, retail, consumer discretionary, industrial, banks and financial. I advise apportioning less than 20% of your portfolio to each sector. To further diversify, invest in stocks developed from several different analyses and methodologies such as Modern Value, A-List Dividend and PEG Ratio approaches. Using different investment approaches will lead to less risk and less volatility than investing across several international markets or asset classes.
Lastly, if you are beginning to build a new portfolio, develop a plan and invest slowly. Buy a few stocks each week during the next one to three months. Your initial choices should be conservative low risk or very low risk stocks. As I have repeated many times, have fun—but remember you’re dealing with hard-earned money that you will probably need some day!
This is an excerpt from Cabot Benjamin Graham Value Investor, which features the very best undervalued stocks to buy right now. Chief Analyst J. Royden Ward tells you exactly which undervalued stocks to buy and when to take profits. This advisory is ideal for conservative investors.
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