How to build a portfolio

MoneyWe've covered quite a lot of ground in our series on investing for beginners, and we now know the mechanics of actually getting going. Time to get on to the hard question, then, which can stump even the most hardened of investors: 'What shall we buy?'

What is the best number of different shares to own? How much should I diversify? Should I go for capital appreciation or income? How about growth versus value?
What strategy?
Some individuals, especially those interested in specific industries, have very focused portfolios -- there are, for example, people who invest solely in the oil and gas exploration business.

Some specialise in what is often known as deep value, which really means looking at shares whose prices are unusually cheap relative to basic fundamentals. A company might, say, possess assets (cash, goods, equipment, etc) whose value exceeds the value of its shares. That's tricky to assess, mind, because of the vagaries of accounting for asset values, and it's easy to get wrong.

Others will plump for growth shares, and look for small companies who they believe have a good chance of making it big. That can be rewarding too, but it's also risky. While some make it big, many fall by the wayside. And sometimes a company will start off well and its shares will fly, and then you buy in just before something goes wrong and they come crashing back down again.

A balanced portfolio
These are strategies you might want to investigate when you have a bit of experience, but most beginners will go for a simple diversified portfolio.

For example, just looking at the FTSE 100 index, you might choose, say, BT Group to get yourself into the telecommunications business.

You could then go for a consumables manufacture like Unilever, which owns so many popular brands it's hard not to be a customer.

Then thinking about the world's energy needs, there are the two oil and gas giants BP and Royal Dutch Shell to choose from.

Add, say, a multi-utility like United Utilities , an insurer like Prudential (LSE: PRU.L - news) and perhaps a big pharmaceuticals company like GlaxoSmithKline (Other OTC: GLAXF.PK - news) , and you already have the makings of a nicely balanced portfolio without having looked outside the FTSE 100.

Good smaller ones, too
There are plenty of solid companies paying decent dividends in the next layer down too, the FTSE 250, and you can look to expand your portfolio there. And then why not add a bit of excitement by going for a FTSE Small Cap company or two?

The key to Foolish investment is to pick companies that you'd want to hold for a lifetime, ideally ones paying decent dividends, and minimise the costs by resisting the temptation to buy and sell frequently.

In all, if you can pick five to 10 good companies, spread across sectors, with a mix of large and medium sized ones, and hold onto them for several decades, the chances are you'll get a nice mix of capital appreciation and dividend income over the years.

And that's exactly what we'll try to do for our beginners' portfolio.

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