Managing a Diverse Stock Portfolio When Your Capital Is Limited

If your goal is to build out a diverse portfolio of at least 25 stocks, it may be daunting to think about how to afford this kind of investment on a budget. In this video clip from “The 5,” recorded on Sept. 24, Fool.com contributors Brian Withers, Jason Hall, Demitri Kalogeropoulos, and Neil Patel offer their strategies for managing a diverse long-term stock portfolio.

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Brian Withers: Bhanu asked, “Motley Fool Premium members,” which we are talking to Premium members here this afternoon, “get more stock recommendations than capital they have, or is it me or do other feels the same?” Yes, I totally get that, Bhanu. You are not alone by any stretch. “If one has 30-35 stocks, how do you use the Fool services, take new positions from every service, or expanding existing positions that are doing good when your capital is limited.” Anybody want to take a crack at that one?

Jason Hall: I’ll jump in real quick with just a quick 20 seconds on this, because this is something I’ve thought about a lot and I’ve been involved in some capacity with a lot of the services as a contractor over the years. I think what you have to be careful with is the fact that particularly a lot of the real money portfolios, their portfolio construction, and you run the risk if you start cherry-picking. Particularly like if you look at 10x, or rising stars, or some of these really high-growth ones. These portfolios are built on the idea that 20 percent of those stocks are going to generate 80 percent or more of the gains. If they recommend 30 stocks in a portfolio or 40 stocks in a portfolio and you buy eight or 10, it’s really easy because of our individual biases to pick eight or 10 that you’re familiar with or you like already, and you miss some businesses that you just don’t know anything about.

I think the fact that with zero trading fees and fractional investing, basically, all of the top discount brokers allow that. I think if you’re going to pay up, you’re going to pay the price to join these sorts of services. Set aside enough capital that even if you’re only putting it $100 or $200 per stock. I think the smartest way to get the returns that these portfolios are trying to generate that you’re signing up for, is even if you have a small bit of each one of them, your best thing is to buy them all, or you have to invest a lot of time and really do the true due diligence to pick the ones that you want. I think that you almost have to take advantage of it the best way by just break up your capital and do some fractional investing.

Demitri Kalogeropoulos: That’s a good point. I would just add, Jason, that I haven’t thought about this question so much, but just off the top of my head. That’s a good problem to not have, number 1, you have a lot of good businesses are doing some amazing things today, and so that’s exciting. But what’s worked personally for me, if you look at it in terms of a company that you like, something that you’re connected to, something that you admire, something that you’re likely to hold on to for a long time, you understand it. Those kind of companies, the ones I would tend to want to purchase. Just I think the first company I ever bought was a Motley Fool recommendation, it’s Marvel. You guys would know that one, of course.

Hall: That worked out OK.

Kalogeropoulos: It worked out OK and then [laughs] it’s the reason I own so much Disney right now. But I remember one of my first experiences as an investor just been like I went to an Iron Man movie and I just remember reading about that in the quarterly reports and then they release it, and then I went to the theaters to watch the movie and just feeling that cool like I own a piece of this movie sort of thing. That feeling I think it’s going to help you hold on to the stock for a lot longer. Usually, that’s the best predictor of your returns going over the long term. A company that you admire, I would tilt in that direction if you can.

Neil Patel: I’ll just add quickly, like we talked about earlier, just depends how much time you’re willing to put into this. If you don’t have extra time then buying, like Jason said, putting a small amount of money into the total portfolio is the best way to go. Because if you’re just going to cherry-pick stocks, there’s a chance you’re going to miss out on the losers, there is a chance you’re going to miss out on the big winners. You’re not putting in a time to figure that out. If you’re just taking that by your gut check. So it depends. Like Demitri said, if you are willing to put the time in companies, number 1, that you understand, that are simple, that you’re interested in, it’s a good place to start, and something that you’re going to keep tabs on going forward. This is a fluid dynamic thing where you’re following a company hopefully for five years or longer. So you want to have a company that you can grasp fully that you will take the time to pay attention to. It goes to the points that both you guys made.

Brian Withers has no position in any of the stocks mentioned. Demitri Kalogeropoulos has no position in any of the stocks mentioned. Jason Hall has no position in any of the stocks mentioned. Neil Patel has no position in any of the stocks mentioned. The Motley Fool recommends Marvell Technology Group. The Motley Fool has a disclosure policy.

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