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Setting up Your Easel

So, you have opened your accounts, transferred in your life savings and now you realize that you need some help with your portfolio. When it comes to portfolio buildings it helps to think like an artist as he sets about to paint his master piece. Don't give up on individual stocks just because of one bad one. I have had a few of these in my day and I just scrape them off my portfolio canvas and paint the spot over with a better stock to creating a masterpiece that has appreciated over time.

Start with a Background of Blue

An artist begins a landscape painting by first applying a background of blue for the sky and water. Like an artist, I suggest you begin with a foundation of blue. Blue chips to be more exact. I look for large well-established companies that are in the major indexes. They should have a history of earnings and paying a large portion of these earnings out in the form of dividends. Dividends indicate to me that that the directors believe that earnings will continue because they are very reluctant to cut dividends as it will negatively affect the stock price, resulting in the wiping out of the value of their options. Large dividends in relation to earnings indicate that the directors are very confident in the earning abilities of the company, but see little in the way of opportunities for growth. I like to receive dividends of at least 25% of the earnings from my blue chip holdings.

While the blue chips will not give me a spectacular capital gains, they will not normally give me a spectacular loss either and if I can get them cheap, it usually isn't be long before they start to appreciate. Also, I use this opportunity to cover the whole canvas. This means diversifying my blue chip holding not only among different companies but also different industries and regions. Like a painting, the more shades of blue, the more the portfolio will have life.

Add Interesting Subjects

Next the artists adds his subjects to the painting. For a painting this might be a boat, a lighthouse or a shoreline, for me this means growth stocks. Here I look for stocks that have a track record of earnings and which pay dividends of less than 25% of these earnings. While the paying of dividends is not essential, their presents indicates that the company's directors believe that the company will continue to be profitable and the low pay out indicates that they see opportunities to grow the company.

It is important not to add your subjects until you are pleased with your background. Be patient, it may take some time before you have an understanding of the markets to allow you to comfortably to invest in riskier stocks.

Finally the Detail

To round out the painting the artist will add small details such as birds flying high in the sky. For me this is a speculative stock that has been well chosen. It must be developing a product or process that has the potential to be the standard in its industry, the resources to see the development of the product to its next stage and above all, the management to keep the development going.

Now a little goes along way when it comes to details in paintings and speculative stocks. The potential rewards should far exceed the cost of these shares, because, like the painting where the details are hardly noticed, you what these investments to go unnoticed too if they go belly up.

Generally speaking, don't add any details until you have acquired some skill at this art form. If you have not been able to consistently beat the market then you are probably not a market Rembrandt.

Frame and Enjoy

Like a well done painting that is framed and hung on a wall and left to be enjoyed and appreciate, a well developed portfolio should be able to stand by itself for many months if not years before it is taken down, dusted off and adjusted. The test of time applies to both paintings and portfolios when determining if you have invested in a masterpiece or just bought trash.

Hope this helps

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