How to Create a Winning Portfolio in a Market at Its Highs

How to Build a Winning Portfolio in Four Simple StepsIt’s a difficult environment in which to be constructing new equity portfolios right now, mostly due to the very simple reason that the stock market is at an all-time record high and it’s likely that monetary policy will change soon.

But there is still a great deal of interest in equity securities and in a lot of cases, individuals require the income that they provide.

There are a lot of really good investment funds and money managers in the marketplace; but for those who wish to build and manage their own stock market portfolios, you want to approach the process methodically and with a great deal of care.

As a stockbroker, I learned a long time ago that financial products are typically sold not bought. Don’t let anyone sell you anything in this market—stocks are at all-time highs.

If you’re looking to the stock market to create a portfolio of companies, just remember that there is no rush to do so. Because of the financial crisis and subsequent recession, policy has been about the re-inflation of assets (mostly financial), and the stock market’s been going up based on the certainty that the Federal Reserve will be extremely accommodative.

Right or wrong, institutional investors used that certainty to buy equity securities.

Traders might like to buy high in order to sell higher, but momentum trading isn’t investing and as an investor, it’s tough buying stocks at their highs.

But the current environment is a good one in which to identify good businesses that can become core positions in a portfolio over time.

In terms of creating a new, risk-averse stock market portfolio (remember that all stocks are risky to some degree), there are a number of different industries worthy of representation. The whole process does not have to be complicated, and the stock market offers a gamut of options.

There’s good income and capital gains potential to be had in the oil and gas industry. Not everybody wants to look at this sector, but I think there is room for an energy-related stock that provides income in any stock market portfolio. Currently, I’m a big fan of energy infrastructure and this includes the transmission, production, and storage of hydrocarbons.

I’m also a big fan of having some exposure to consumer staples and the kind of companies and brands that mature economies consume every day—companies like Colgate-Palmolive Company (CL), PepsiCo, Inc. (PEP), NIKE, Inc. (NKE), and V.F. Corporation (VFC).

The financial industry is an enormous part of the global economy, and despite it’s well-earned reputation, there are attractive assets out there. I think one of the Canadian banks could make for an excellent addition to a long-term stock market portfolio, due to the industry being a protected market, or basically an oligopoly, in that country. Because of this, investment returns have proven to be very good over time, and so is the income that these financial institutions provide.

In terms of technology, a portfolio is well served by having an old-school technology brand along with a stock that uses technology but isn’t a pure play, like a Microsoft Corporation (MSFT) position equally weighted with Automatic Data Processing, Inc. (ADP).

And a stock market portfolio can’t go without some exposure to health care. My favorite conglomerate in this area is still Johnson & Johnson (JNJ). (See “Top Stocks Poised for More Gains in Slow-Growth Market?”) Here, the company offers several different healthcare business lines anchored by pharmaceuticals.

This method is all about creating conservative exposure to the stock market. It’s very easy to get five to 10 stocks that can be portfolio benchmarks.

So while now might not be the greatest time to be a buyer, it is a good time to be re-evaluating investment risk and identifying great stocks to consider when they experience price retrenchments.