Building a second-tier portfolio

Building a good investment strategy can take months of research. But once you’ve put it into action, there’s not much to do but wait and monitor your growth – save for a few adjustments you’ll make as needed.

Instead of passively waiting for their money to grow, some investors choose to take a more active role by building a secondary portfolio of speculative shares.

This involves selecting shares with very high prospects for growth, such as bagger stocks.

This strategy carries a higher risk than traditional investing, and there’s a possibility that these types of shares won’t amount to much or anything at all. For this reason, it should ideally make up a small percentage of your overall portfolio.

As with your long-term investments, you should have a written strategy in place for your secondary portfolio. There are a few points to consider when you build one – how financially prepared you are to participate, for instance.

We’ve put together this list of questions you can ask yourself before using this strategy:

1. What impact will this portfolio have on my ability to build wealth in the future?

2. How much am I willing to put towards speculative investments?

3. What type of investments am I looking for? Here you can consider:

• Companies in certain speculative sectors, for example artificial intelligence
• Companies with small or medium market capitalisations
• Companies listed in developing economies

4. What criteria would a company have to meet before I invested in it? Here you can consider:

• The number of competitors in the market
• The legislation that impacts how that company does business
• The product offering
• Its consumers
• Its fundamentals, like the price to earnings (P/E) ratio

5. If the company no longer met one or more of the original criteria after I bought it, what would I do?

6. By how much would the investment’s price have to rise or fall before I sold it?

Momentum investing is based on the thought that growing shares will continue to do so while shares that are falling in value will continue to fall. When you use this strategy, you’re taking advantage of shorter-term market volatility. The idea is to sell holdings that are leaving their peak in order to buy more stocks that are on the rise.

However, this type of active share dealing can be quite costly. It involves making several transactions in a short space of time which could each incur a transaction fee. Plus, the risk you’ll lose some, or all, of your money doing this is high. So you should set aside money you’ll use to build one; avoid tapping into funds that are earmarked for more important things.