- 1Start with clear goals: time horizon, risk tolerance, income needs
- 2Diversify across 15–30 stocks minimum for adequate risk reduction
- 3Weight positions by conviction, not equally — but cap maximum positions at 5–10%
- 4Rebalance quarterly or when positions drift 5%+ from targets
- 5Use factor analysis to select fundamentally strong stocks
#Step 1: Define Your Investment Goals
Before buying a single stock, answer these questions:
| Question | Why It Matters |
|---|---|
| When do I need this money? | Time horizon determines risk capacity |
| Can I tolerate a 30% drawdown? | Risk tolerance shapes asset allocation |
| Do I need income from this portfolio? | Determines dividend focus |
| What's my tax situation? | Affects account type and strategy |
| How much time can I dedicate? | Determines active vs. passive approach |
#Step 2: Determine Your Asset Allocation
Asset allocation — the split between stocks, bonds, and cash — determines roughly 90% of your portfolio's return variation.
| Profile | Stocks | Bonds | Cash |
|---|---|---|---|
| Aggressive (20s-30s) | 90–100% | 0–10% | 0% |
| Moderate (40s-50s) | 60–80% | 15–30% | 5–10% |
| Conservative (near retirement) | 40–60% | 30–40% | 10–20% |
Within the stock allocation, consider: - U.S. vs. international split - Large-cap vs. small-cap exposure - Growth vs. value tilt
#Step 3: Choose Your Stocks
Using Factor Analysis
Our 6-factor model provides a systematic framework for stock selection:
- 1Start with composite score — Focus on stocks in the top 20–30%
- 2Check individual factors — Ensure no single factor is severely negative
- 3Verify sector diversification — Don't load up on one industry
- 4Review fundamentals — Confirm revenue trends, margins, and debt levels
How Many Stocks?
| Number | Diversification Level |
|---|---|
| 5–10 | Concentrated — high risk, high conviction |
| 15–25 | Well-diversified for most investors |
| 25–40 | Broadly diversified — lower individual stock risk |
| 40+ | Approaching index-like returns — consider an ETF |
Research shows that most diversification benefits are captured with 15–25 stocks across different sectors.
#Step 4: Size Your Positions
Equal Weight
Every stock gets the same allocation (e.g., 20 stocks × 5% each). Simple and diversified, but treats your best ideas the same as your weakest.
Conviction Weight
More money in higher-conviction positions. Example: - High conviction (5 stocks): 8% each = 40% - Medium conviction (10 stocks): 4% each = 40% - Lower conviction (10 stocks): 2% each = 20%
Risk-Based Weight
Allocate more to lower-volatility stocks, less to higher-volatility stocks. This equalizes each position's contribution to portfolio risk.
Key rule: Cap any single position at 5–10% of the portfolio. No matter how confident you are, concentration risk can devastate returns.
#Step 5: Diversify Across Sectors
| Sector | Target Range | Why |
|---|---|---|
| Technology | 15–25% | Growth engine |
| Healthcare | 10–15% | Defensive + innovation |
| Financials | 10–15% | Economic exposure |
| Consumer Staples | 5–10% | Defensive anchor |
| Industrials | 5–10% | Economic cycle exposure |
| Energy | 5–10% | Inflation hedge |
| Other | Balance | Fill gaps |
Don't mirror the S&P 500's sector weights (30%+ tech) — that's concentration, not diversification.
#Step 6: Rebalance Regularly
Over time, winning positions grow and losers shrink, distorting your original allocation. Rebalance by:
Calendar Rebalancing
Review quarterly and sell winners / buy losers back to target weights.
Threshold Rebalancing
Rebalance when any position drifts more than 5 percentage points from its target.
Tax-Smart Rebalancing
Use new cash contributions to buy underweight positions. Sell overweight positions in tax-advantaged accounts first.
#Step 7: Monitor and Adjust
What to Review
- Factor scores (have fundamentals deteriorated?)
- Earnings results (is the thesis intact?)
- Sector exposure (still diversified?)
- Overall market conditions
When to Sell
- Factor scores drop significantly
- The original thesis is broken
- Better opportunities available
- Position becomes too large
When NOT to Sell
- Short-term price drop (without fundamental change)
- Market panic (emotional selling destroys returns)
- "Better stock" FOMO (grass-is-greener thinking)
#Use Our Tools to Build Your Portfolio
Last updated: February 6, 2026