one of the most common questions that brian and i get asked on social media is how to go about
building a portfolio how many stocks do we own what's our time horizon how do we go about adding
them and what allocations we're going to walk through our investing philosophies in this video
thanks to Quartr for sponsoring today's video hi brian we want to build an investment portfolio
for ourselves what's the very first step well brian the starting point is actually so simple
some people might even skip over it and that is to define what it is you're aiming for by
investing in the first place what is the reason that you are putting capital into the stock market
what's its purpose and when do you need to use that money that's a really really important
question that you need to know the answer to i know some investors personally who actually write
these down into an investor policy statement and that guides the decision making around the concept
building a portfolio brian so walk us through your time horizon and your investing strategy
all right so i take the time horizon of at least 10 years and i'm investing yes to give my family
financial flexibility in the future but to be honest the thing that really drives me is testing
my own ideas and beliefs about anti-fragility in the real world by investing in companies that
share these characteristics my investing time horizon is very similar to yours it's at least
a 10 year outlook and i am personally investing in order to grow my wealth so that i can make my
personal finances as bulletproof as possible to do so i keep my personal finances hyper conservative
that allows me to put my investments into hyper aggressive stocks now i am not necessarily a
completely aggressive stock investor i am trying to fill my portfolio with high growth companies
that have a low business risk now what you're about to see might sound like we're giving
you hard and fast rules for how to build your portfolio that's actually not the case at all what
we're about to discuss is the guideposts that we use to construct our own portfolio these are not
hard and fast rules that we follow to the t but we do think it's important to use them so that we can
guide our decision making about asset allocation all right brian let's say we're researching a
stock from scratch and both of us are very excited about it how would you go about initiating a
position in a company brian i've developed a rule that i call the gut plus two weeks if we run a
stock through my framework and i'm excited about it and do some research on it that's great but
too many times i've been excited about a company made a big purchase and ended up regretting it
because of that i give myself two weeks to cool down and if i'm still excited about it i'll make
a purchase how much i like for my initial purchase to be between one and two and a half percent of my
portfolio depending on my level of conviction my approach is actually very similar to yours brian
we have a natural built-in waiting period because both of us are contractors the motley fool and we
have to go through their compliance rules before we can make any purchase but in general when i
get really excited about a stock that scores very well in my framework i typically wait about a week
before i make my first purchase and my initial purchase is about half a percent to at most
one percent of my portfolio so i like to ease into positions very slowly all right brian that's our
initial position how do we go about adding to a position over time brian the most important
thing is making sure that the thesis the reason that i invested in a company in the first place
is still on track and that usually means waiting a few quarters to digest some new numbers and
learn more about the company once i have enough conviction that the thesis is on track or might
even be better than i originally hoped for i might make a total of two to three purchases in
a stock now this is important i try to never add to any position once it reaches five percent of my
portfolio that means that if i made a two percent allocation and that stock did fantastically well
and it grew to be five percent in short order i might only make one purchase i like to stop at
five percent and a company growing has to do the rest of the work my philosophy is very similar
to yours like you i like to wait for a couple of earnings reports for me to confirm that my thesis
for owning that company is on track and if i want to make additional purchases i tend to do so in
point five percent increments unlike you once the stock becomes three percent of my portfolio that's
when i stop buying i won't sell it it's just at that point it's up to the company to do the heavy
lifting of making it a larger percentage of my portfolio not my personal cap one other thing i
try to do when i'm building a position is do something called buying at better and better
value points as an example of that between 2010 and 2015 i was personally building a position in a
company called mercado libre ticker symbol m-e-l-i this chart shows the price that mercado libre was
trading at during this five-year period you can see it was going up and it was going down but the
overall trend was up and to the right during this period i was personally buying mercato librette
several different times why because the company's thesis was clearly on track if you look at any of
the company's key metrics revenue customers item shipped etc they were all trending in the right
direction rapidly so while my purchases were made at various times during this time period
importantly i was trying to get this company at better and better valuations over time
let's change this chart away from showing the company's stock price to showing the company's
price to sales ratio while mercado libre's stock price was going up up up during this time its
revenue was actually going up at a faster rate for that reason the company's price to sales ratio
actually declined even though its stock price was rising what i was trying to do with each
of my follow-on purchases was to buy the company at a lower valuation than i got with my initial
purchases now what you see here wasn't exactly my purchases but it embodies the idea beautifully
with my first purchase i got in around 15 times sales and what i was trying to do with future
purchases was lower the valuation that i paid for that company there's two ways that that can happen
first the stock price can decline second the stock price can stay flat or even go up however revenue
would have to grow faster than the stock prices going up in either instance i'm trying to time the
valuation of the company not just the price itself which leads us to our next big question what
happens if you do hook a great investment but it becomes too large a percentage of your portfolio
for my own portfolio i start paying attention once one stock is at least 15 percent of the overall
holdings i'll monitor it then and if it reaches 20 that's where i'm gonna start trimming no matter
what importantly if i ever need new money to make a purchase or for life expenses i will take first
and foremost from this position that's already reached 15 of my portfolio i do something similar
to you brian if i think a stock is very high risk i'm going to try and cap my exposure to it at
about 10 of my portfolio conversely if i believe that a business is a very low risk business
i'll allow it to become 15 of my portfolio before i would start to trim it that leads to the age-old
question how do you decide when to sell a stock for any reason knowing when to sell is one of
the most difficult questions that any investor can face however we have a couple of guidelines that
we think can help out before we get to that we want to thank this video sponsor which is Quartr.
Quartr's mission is to make every action between companies and investors meaningful quarter does so
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if you're interested in giving Quartr a try for free visit the app store of your choice and search
for quarter that's q-u-a-r-t-r thanks quarter for sponsoring the video all right brian let's cover
the reasons that we think you should consider selling first and foremost if your thesis changes
that is a sign that you should think about selling a stock there are a lot of different reasons why
your thesis might change the important thing to know is that if it does it might be time to
take action the second reason to sell is in a category that we call emotional reasons to sell
that includes things like losing sleep because an investment is too risky for you or losing interest
in following the company at all or like we just talked about needing to rebalance a stock because
it's become too large in your portfolio a third reason to sell could have nothing to do with the
business or the stock itself and could actually have to do with just paying taxes this includes
things like tax loss harvesting particularly at the end of the year or re-upping your cost
basis for what you own i've personally sold out of losing positions in companies just because i
was interested in lowering my tax bill that's a perfectly fine reason to sell and the final
reason that we think it makes sense to sell is when your priorities need realignment by that
what we mean is your life changes and as it does your priorities will so you might decide
that money is better off somewhere else you might need that money within the next three years and
if you're moving closer to retirement you might want to hold more conservative stock one of the
biggest traps that investors can fall into when they're thinking about buying selling
or allocating capital is they often think in terms of binary black and white decisions it's yes or no
it's all or nothing however we don't think that's a helpful framework yeah it's a really easy trap
to fall into when you're investing to see things as black and white but that's not how life works
and it's really important to be able to see the gray just about everything that has anything to
do with investing is filled with nuances it's important to develop guidelines for yourself
and to do your best to use those guidelines as north stars for decision making that's about as
best as you can do one of the key tools that we have both found that helps us to see that nuance
and that great is to use an investing journal when you use a journal you can write down your reasons
for buying you can also write down some of the things that might make you want to sell a stock
and by going back and revisiting this when you need to make a decision you can become a better
investor by learning more about yourself and the companies you're investing in i've
personally been using investing journal for many many years and i forced myself to write down
what i'm gonna do it before i do it taking the time to do that can really pay off and can prevent
you from making the same mistakes over and over again we hope you found this video helpful how
do you build your investment portfolio we'd love to hear in the comments section below brian's out