2 types of stock portfolios primed to beat the market: experts

Earlier this week The Motley Fool reported on the ASX share portfolios that should ring alarm bells. 

This time let’s take a look at the opposite — portfolios that are ready to beat the market.

Of course, success is not confined to just these models. But the team at Marcus Today reckon these two styles have a great chance of beating the market:

Portfolio to invest for income

We already heard how useless it is to have a portfolio stuffed solely with large cap ASX shares.

Not only does such a batch have a poor chance of beating the market, it encourages laziness. The investor may not keep track of what’s happening with those businesses, armed with a false sense of security from the big names.

“It may seem normal and sensible, but the truth is that if you’re going to do this ‘moron portfolio’ thing, you’d be better saving yourself from a lot of admin, activity and lost evenings and weekends by just buying market ETFs,” read the Marcus Today blog post.

But converse to that is owning a “big 20” income portfolio.

“Unlike holding a portfolio of twenty big stocks just because they’re big, picking 20 stocks for yield is a sensible use of your time.”

Constructing such a stable requires some intelligent research to pick ASX shares that are high yielding but have relatively low volatility.

Not all income stocks are born the same, the Marcus Today analysts warned.

“Banks are income stocks. They are boring, safe, have high payout ratios and few ambitions. They understand the importance of their dividends to shareholders and will pay them come high water,” the blog read.

“Resources, on the other hand, are cyclical. They offer high yields in the good times but as we found out from Rio Tinto Limited (ASX: RIO) at the last results, not all the time.”

Portfolio to invest for growth

The other model the Marcus Today team favours is owning a portfolio of just five to ten ASX shares and looking after them really well.

“This is probably the most ‘fun’ and intellectual, yet least guesswork way to make money out of stocks,” read the blog.

“The trick is to keep the list short so you know the stocks. Five would be a good number.”

The idea here is that owning five companies that you really know well and closely follow is infinitely better than a portfolio of 20 businesses that you have little idea about.

The stocks are bought with a long-term horizon, then “maybe three or four times” a year the investor would review the portfolio to sell and buy other ones.

“You know them well, get to understand how they trade, what they do, when to buy them and when to sell them.”

This concentrated portfolio is the opposite of another “red flag” the Marcus Today team raised: stock picking anything and everything.

“Trading everything and anything — it involves tips and it invites a lot of volatility, risk and reward,” stated the blog.

“It is for people who don’t have a heart condition. This is riding the stormy seas.”

The post 2 types of stock portfolios primed to beat the market: experts appeared first on The Motley Fool Australia.

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Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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