I already have some investments in ETFs, but now I want to invest around $10,000 in stocks on the long term. As a beginner, I am very confused about designing my portfolio.
The most two confusing questions are:
Is it better to pick 2-3 stocks, or to distribute the money on 10 stocks? (high risk profile is ok)
Is it better to get small caps (hoping for growth) or to go along with the big names?
I searched online a lot but could not find a convincing answer. You know, every start is difficult…
Every advice is appreciated!
I’ve only been investing for about 2 years now but here’s my opinion, of course Allah swt knows best. There are many ways you could look at this to be honest. 2-3 stocks are risky for many reasons, but I believe it is better to diversify your portfolio into different sectors (REITS, consumer products, infrastructure, energy, tech, etc) as best you can when creating a portfolio to minimize loss. The less stocks in your portfolio, the riskier.
You also need to think about what type of portfolio you would like to build. Perhaps a dividend portfolio that builds upon itself (realistically giving payouts anywhere from 2-5% depending on what you’re investing in), but keep in mind the value of these stocks usually don’t grow as much as most stocks with lower/no dividend payouts.
Some create “growth” portfolios, or stocks that usually don’t pay dividend at all or minimally, expecting it to grow exponentially over a long period of time. Think Google, Amazon, and tech giants like ServiceNow or Salesforce. This approach is obviously riskier.
If you’re totally unsure which direction to go in, look into a shariah compliant investing platform such as Wahed to manage all of this for you! There are a few others too you can look into.
I have one dividend portfolio, one growth portfolio and one account with Wahed haha I myself couldn’t choose just one route, but perhaps you can.
This is a tough question for anyone to answer. It depends on your situation.
If your ETF portfolio is the bulk of your portfolio such that the $10K is a small % then you could concentrate. It also depends on your stock picking abilities. Have you had success in the past and feel confident about it? How would you react on a large loss?
Here are some wisdoms from Peter Lynch - one of the best ever
Own as many stocks as you can follow closely. Never get involved with more than you can follow.
If you are doing this part time, 10 may be sufficient
Finance Portfolio theory says at 15 stocks your portfolio is diversified enough
On Point 2, even large companies can grow…maybe not as much as the smallest cos but if you check the top 5 largest cos in the US, they are growing at pretty good clips 10%+ even as much as 30%.
If you have never designed a portfolio, i would spend 1 day to read the Peter Lynch book One up on Wall Street first. and then you need to think if you have the basics of financial statements or how you will be taking the short cuts to pick stocks…
According to me you should invest your money in diversified sectors. You can concentrate on AI, Genome, Smart Glasses , Bitcoin Mining, Electric Storage and Quantum Computing Sectors.
do i understand an industry or am I willing to learn about an industry before investing in it
will i read the annual report, quarterly report and press releases
If you answer no to one or more, than you are likely speculating instead of investing.
I would suggest sticking with ETFs.
Select 2 or 3 stocks (your 2 questions above are irrelivant to investment selection, rather are more about portfolio construction) and record your the price at which you decide to make a phantom purchase. See if you can address the first 3 question I ask over the next 6 months. If you do, you will understand why you two questions are secondary to making a sound investment.
Many thanks for your reply, Mohammad.
May I ask about the stocks in your growth portfolio? I do not want to copy anyone, but just to have an idea about the available choices. This would help me a lot as a beginner.
Many thanks for your reply, Motiwala.
I really appreciate your tips and your advice about Lynch’s book. Its rating is excellent, I bought it right away and I will sure read it before buying any stock.
Do you have one advice about stock picking for a beginner?
One of the best answers to my questions.
I would then carefully pick 3 stocks for this amount of money and do the analyzation you mentioned and stick with it on the long term.
Many thanks!
Start with a company or industry you know or have an interest in learning about. But go for simple businesses that you can understand - how they make money, who are customers , competition etc.
Check for the best companies in a given industry. not the weak players
Wa alaikum as Salaam WRWB
I invested a similar amount from my 401k into a dow jones islamic mutual fund (IMANX) around 2 yrs ago and today it’s been 37% gain Alhamdulillah. I think index and mutual funds are a low risk and a good entry point for beginners. And Allah knows best.
Thanks.
