How to build a long-term portfolio of shares

TO beat inflation investors should focus on strategies that use dividends as a contributing factor in their share portfolio to realise long-term returns.

You must determine what you are willing to invest in and if it is local or international.

It is critically important to consider the potential risk of any given investment opportunity and compare it to the potential reward – a simple cost to benefit analysis.

Some important factors to consider include your age (and the point at which you are planning to deploy your capital), the amount you have available to invest, your projected capital needs and what other resources you have available like existing discretionary investments or long- term savings vehicles.

Conservative investors tend to prioritise protecting their capital and maintaining the value of their investment, while aggressive investors are comfortable with a medium to high degree of risk.

When constructing your portfolio, keep diversification in mind. Your capital should be hedged against risk by being invested across different sectors.

A basic distinction to make when discussing the use of dividends in your investments is the one between ordinary shares and preference shares.

The way these shares award investors dividends is the main difference between them. With ordinary shares, a company chooses whether to pay a dividend of earnings or to employ the capital elsewhere.

Ordinary shares can be broken down into various sub categories. These include:

ý Growth shares (which increase in value faster than the rest of the market);

ý Income shares (which pay dividends on a regular basis);

ý Value shares (those that become available for prices lower than their true value);

ý Blue chip shares (known for steady, stable growth over the long term); and

ý Speculative shares (or penny stocks – unpredictable, but potentially highly rewarding in new, smaller companies).

Owning preference shares entitles you to a dividend of earnings, which the company is obliged to pay.

To decide which to invest in, you must consider a share’s fundamentals.

These include qualitative and quantitative data used to determine a share’s intrinsic value.

Is the company’s revenue growing, is the company turning over a profit, how strong is the company’s competitive advantage and how much debt does the company hold?

The best advice for a new investor is to try not to be overly concerned with the day-to-day performance of the individual shares.

Diversify your investment and let it grow. Do not sell any shares within the first year, think long-term and keep your investment objectives clear in your mind.