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  • Haddon B. Libby

Building an Equity Portfolio



When investing in equities, it is best to set up some parameters before you start investing. As an example, someone who is in their twenties can invest with a greater level of risk than the person who is living on their savings. This means that the younger person might have most if not all of their investments in equities while the retired person would be looking for more stable income.


For our purposes, let’s consider stocks only.


Approximately 60% of all stock value is located in United States while the remainder is in companies located around the rest of the world.


This is where you need to make your first decision. Do you want to invest proportionately across the world, or do you want to put more in US or non-US stocks?


Once these percentages are determined, you can move on to the mix of companies that you may want to invest in. As a general rule, avoid companies that do not provide audited financials to investors. To avoid these types of companies, you generally want to avoid Chinese stocks, Pink Sheet stocks and smaller stock exchanges like the Vancouver Stock Exchange which was known for its fraud and money laundering schemes.


Once you determine the US/non-US mix of investments that you are comfortable with, you want to think about how the percentage of your stocks that will be in large, medium or small-sized companies. Generally, smaller companies are more risky than larger companies. As we have seen during the pandemic, large companies can borrow and issue stock with ease while small businesses struggle to survive.


In building a diversified investment mix, start with the knowledge that about 76% of the US market is in the 500 largest companies. The next 400 companies are referred to as Mid Cap stocks and represent about 18% of the US market. The next 600 companies are considered small cap and represent about 6% of the market. A current anomaly is that five or six companies represent 25% of the 500 largest companies – the highest level on record.


If you were to have 60% of your investments in US stocks and wanted to stay evenly invested across the market, you would keep 77% in large cap stocks, 18% in mid and and 5% in small cap. If you had been over weighted toward small cap stocks going into the pandemic, your performance would be weaker than the person who underweighted this sector and focused on large cap stocks.


At this point, you can think about the industries that you want to focus on. Technology represents about 25% of US stocks while Health care is 15%, Financials, 13% and Real Estate 4%. Generally, you want to stick with market weightings unless you believe one industry will do better or worse than another. It is advisable to set some upper limits on how much you are willing to invest in any industry sector.


This is where it is important to avoid putting all of your investment eggs in one basket. If you invested everything in energy companies a few year ago, you would be significantly poorer today. Similarly, if you invested everything at the heights of the technology bubble of 2000, you would have had to wait a very long time to earn back your initial investment. Given the current market rally that has happened at the start of what is likely to be the hardest economic period for the United States since the 1930s, investing enthusiasm should be tempered by some of the realities facing the US economy as well as other nations around the world.


Lastly, if you are investing in individual companies (versus a fund) and you are not comfortable reading and dissecting the SEC reports and financial statements of your investments, learn how to read unbiased research reports.


When investing, have a game plan that selects the mix of assets that you ideally want before you start buying the assets. In this way, you are more likely to build a more diversified and better constructed portfolio.


Haddon Libby is the Founder and Managing Partner of Winslow Drake. For more information, please email Hlibby@WinslowDrake.com.

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