How to build a 6-figure investment portfolio (part 1)
Nineteen dollars and forty cents.
That was the very first amount we set aside for charity back in 2014.
There was no champagne popping although we congratulated ourselves with some eggs and toast at Ya Kun Kaya Toast.
It was a start.
Fast forward to today, including capital gains, dividends and more cash injections, this amount is now on its way to becoming a six-figure stock portfolio. Yup, starting from just $19.40…In this article and the next, I just wanted to share with you the process of getting there, so you know that you are not alone on this journey and that you’re on the right track.
‘I have $10,000 to invest right now…
what stocks should I look to buy?’
Now some of you may be sitting on cash and eager to deploy what you have on hand. It’s totally understandable because you’ve seen how investing can work. You want to get feet wet and start making some money.
But here’s the thing… investing only works if you do it the right way.
Your rate of activity doesn’t determine your overall returns.
But the kind of businesses you invest in and their valuations do.
‘It wasn’t hyperactivity, but a hell of a lot of patience.’ — Charlie Munger
We’ll take our dividend portfolio as an example:
When we started The Fifth Person, we created a charity portfolio that focuses on dividend stocks and REITs. The portfolio and the dividends it generates are set aside for charity. (If you’re curious to know more, here are more details of our charitable efforts.)
If you notice in the portfolio above, it doesn’t have a lot of activity — we only averaged about four purchases per year.
Some years we bought more, some years we bought less, depending on market conditions and stock valuations.
And if there are no opportunities in the market, we wait.
It is more prudent to wait for the right opportunity and invest only when your potential to profit is at its highest.
So what do you do while waiting?You build up your capital.
It Takes Money To Make More Money
The value of your portfolio can increase in three ways:
- Capital gains
- Capital injections
The one that’s most overlooked is capital injections.
Because the more money you save and inject into your portfolio, the more you can obviously make on your investments. For example:
A 50% gain on a $10,000 portfolio = $5,000
But a 10% gain on a $250,000 portfolio = $25,000
And just a 5% gain on a million-dollar portfolio = $50,000
When you have built up a large amount of capital, that’s where the magic really starts to happen.
I call it the ‘Tipping Point’.
Ask yourself — which is far easier to achieve?
- Finding companies that can grow 5-10 times in size OR
- Finding companies that give you a 5-10% return annually
If you invest $10,000 in a stock that returns five times your money, that’s an amazing result! But being able to consistently unearth a stock like that is extremely rare.
On the other hand, simply investing a million dollars in a safe dividend portfolio that yields 5% p.a. will net you the same return in absolute dollars in one year.
The rich keep getting richer and it’s true.
The one difference: capital.Because at the end of the day, wealth is still being measured by absolute dollars.
Good Things Come To Those Who Wait…
Don’t be too eager to jump into the market just because you have a fear of missing out. Instead, find the right companies at the right valuations.
And when the opportunity finally presents itself, don’t hold back to deploy the capital you’ve been saving for all this while.
‘The stock market is a no-called-strike game. You don’t have to swing at everything — you can wait for your pitch.’ — Warren Buffett
I know it sounds like common sense, but it’s not very common among retail investors who jump at every ‘insider’ tip or hot stock they see.
Remember, it’s OK to hold onto your cash if there are no opportunities in the market. There’s no rush to invest.
And while waiting, simply build up more capital.
Because while it’s amazing owning a stock that can return 5-10 times your investment, it’s even better if you had a lot more capital to invest in it!
Thanks for another well written reminder about the common-sense, easy to forget advice 🙂
Main question and takeaway:
> “invest only when your potential to profit is at its highest”
How to decide between timing for higher potential profit, when not investing soon enough leads to missed gains too?
Would it be acceptable to invest in low-risk guaranteed return (with enough liquidity) and then from there transfer to whichever opportunity appears worth moving funds into?
Glad you enjoyed the article!
What the line means here is to only invest when stocks are undervalued. Of course, we can never time the market perfectly or know when a stock will be at its cheapest. But if we only invest in great companies at obviously low prices (and not necessarily the lowest prices), we should do well over the long term. 🙂