Table of Contents
Introduction
If you search on the internet to learn about how to build a stock investment portfolio, you will find two types of content: articles and videos.
Articles will primarily be from large banks and investment firms, such as Citi, HSBC, Vanguard, and SBI Securities. Although these articles are written by people in the game, I think they are not particularly useful to us. Why? Because they only talk about concepts instead of highlighting the intricacies of the stock portfolio construction. They will tell you to set goals, talk broadly about which assets to buy, diversification, tax implications, etc, all general stuff.
But my question is this: “A normal retail investor, who wants to learn about how to build a stock portfolio, for him, do these articles give any actionable inputs?”
I think, after reading these articles, the reader cannot gather the confidence to go ahead and start building a stock portfolio on their own.
Video content is better than articles, but again, these are made by people who probably had a six-figure monthly salary from the start of their career. For such people, building a 2-3 crore worth of stock portfolio is a lot easier. Some may have also inherited or borrowed the invested capital from their families.
Hence, I thought to share my idea of stock portfolio construction. I’ll tell you how a normal retail investor, who can probably save only about 5-10K each month can build his own stock portfolio.
I’ll not only tell you the rules, but I’ll also share how I’ve been building my stock portfolio since year 2008 (when I was just in my early 30s).
Minimum amount to invest in the stock market (Your Savings)
The minimum amount and frequency with which we can invest in the stock market are dictated by two variables: (1) trading cost minimization and (2) monthly savings.
If you are using a trading platform which charges brokerage along with other costs like taxes and duties, etc the minimum amount you must invest at a time to buy stocks is about Rs. 6,500. Below this value, you will end paying more extra cost.
The next control point is the quantum of your monthly savings.
Suppose you are someone who can save only Rs. 3,500 from your monthly income (after considering all types of costs). Remember, I’m talking about those savings that you can afford to lose without compromising your standard of living. In this case, you can buy stock only once every two months (3,500 x 2 = Rs. 7,000).
Once you have the money in your hands, the next step will be stock picking.
Step #1: Creating a watchlist of stocks
While you are building your savings, you can create your own stock watchlist.
Why is having a watchlist essential?
There is one most basic rule in stock investing that tells us to buy only fundamentally strong stocks. We cannot expect to buy any tom-dick-and-harry stocks and expect to grow our wealth. We must painstakingly strive to buy only strong stocks.
There are two ways to identify strong stocks: (1) Difficult way: do your own stock analysis, (2) Easy way: pick your stock from the indices (like Sensex, Nifty 50, Nifty Next 50, etc). These are not just any stock; our stock exchange (NSE) has created this list of selected companies that we can consider as strong by default.
Beginners can start with the Nifty 50 index as their watch list. This index has a list of 50 stocks as its constituents. The idea is to buy only from this list of 50 stocks.
Tip: You can create a watchlist of 50 stocks in Excel or Google Sheets. This ready list of stocks will be your reference point. Whenever you are ready with sufficient funds for investing, you will buy stocks from this basket only. You can also check my Stock Engine to get a ready list of stocks (non-banking) included in the indices like Sensex, Nifty 50, Nifty Next 50, Nifty 100, Nifty Midcap 100, Nifty Small Cap 50, Nifty Small Cap 100, and Nifty Small Cap 250. As you gain experience in stock picking, I’ll suggest that you go beyond the Nifty 50 basket and add quality stocks from the other indices as well. But do not increase your watchlist beyond 200 stocks.
Quick Link: Stock Engine > Stock Screeners > Screener Themes > Index Stocks
Step #2: Shortlisting Stocks
In this step, you will actually get ready to buy your first stock.
This step is further divided into three sub-steps:
- #2.1 Find a list of 5 stocks: From the Nifty 50 basket, find those stocks whose price has corrected the most in the last one month (30 days) and three months (90 days). You will have to search for it on Google, or you can also use a tool like Stock Engine to get this data ready-made for you. Keep a note of these price price trends. The purpose of this step is to find those 5 stocks that have corrected the most. Why? Because such stocks are are less likely to trade at an overvalued price levels.
- #2.2 Shortlisting further to 3 stocks: Note the dividend yield of the above shortlisted 5 stocks. The purpose is to further shortlist 3 stocks whose dividend yield is maximum. Why is the focus on dividend yield? High dividend-yielding stocks, from the Nifty 50 basket, are another sign of relative undervaluation. In this step, you are shortlisting those stocks which has already seen the maximum price correction and are also yielding relatively higher dividend yields.
- #2.2 Finding one pick: In this step, you will add more data to the above filtered 3 stocks. Check out, of the above three stocks, which stock has the lowest P/E ratio.
So now you have the price trend, dividend yield, and P/E ratio. Pick one stock from this list.
You will have to keep repeating the above three steps every time you have funds available for investing. From my experience, I can tell you that in the next 12 months, you will have about 8-10 stocks in your portfolio.
In about 2 years, you will have about 20 quality stocks in your portfolio.
It is important to limit the number of stocks to 20. Why? Because it is not enough to only add stocks to the portfolio. It is equally important to keep reading the related news. The larger your list, the more clutter will become your news inbox.
Why do we need to read the stock-related news? Sometimes, such news flow can help you to time your entry ot exit. How? For example, in the past I have used these news pieces to make buy or sell decisions on my IT basket, specific stocks like PayTM, Future Retail, Polycab, FMCG Basket, etc.
I’m inherently a contrarian investor; hence, important news flows often shape my buy-sell decisions. I’m mostly influenced by negative flows as it has given me good entry points in quality stocks (my past history).
[Note: Every stock that you buy, the transaction must be recorded in an Excel Sheet or in a Google Sheet. Just note these details: Date of transaction, name of stock, quantity, and total amount spent.]
Step #3: Calculate CAGR, Average Holding Time of Stocks, Stock Weight
To execute step #4 (rebalancing), we will need to first build a specific database.
For each stock, we must know the following data:
- Individual weight of each stock in the portfolio.
- Annualized return (CAGR) for each stock.
- Weighted average holding time (in years) for each stock.
Weight calculation is relatively easier. It can be calculated using this formula: quantity x current price/portfolio size. When I say portfolio size, it means the cumulative value of all stocks in your portfolio. Suppose you have bought stocks whose total current worth is one lakh. In this case, your portfolio size will be one lakh.
Annualized Return (CAGR): You will have to do this calculation in Excel or Google Sheets. I generally keep this data in my Google sheet. One example of how to calculate the CAGR of a stock that has been bought at different time intervals is shown below. Use the XIRR formula as shown below.
Weighted Average Holding Time: This calculation is a bit trickier, but for long-term investors, it is as important a data point as the CAGR. Why is this data necessary? Suppose you bought a stock called ABC Ltd. (Qty 30 numbers) on 14-April-2021. If today is 22-Oct-2025, the holding time be about 4.52 years. But suppose you again bought (Qty 120 numbers) of it on 23-Oct-2024. Now, if I ask you to tell me the holding time of your stock, how will you calculate it? You see, it becomes difficult to estimate, right? This is where the concept of weighted average holding time becomes useful. In this case, the weighted average holding time will be 1.7 Years. You can see that, though you started buying ABC Ltd way back in 2021, as the majority was purchased only in 2024, the holding time is much lower.
If you have done multiple such purchases, the task becomes even more complicated. Hence, the usage of average holding time becomes necessary. This task of average holding time calculation can be easily done in Excel or Google Sheets. Use the SUMPRODUCT formula as shown below to estimate the number for each stock.
Step #4: Portfolio Rebalancing
This is another important step where overexposures in stocks can be managed.
To identify stocks that are overexposed, check if all of the following conditions are met by a stock:
- Condition #1: Weight is greater than 100/number of stocks. If the number of stocks is 20, the individual weight should be lower than 5% (100/20), and
- Condition #2: The CAGR of the portfolio is greater than 30% per annum, and
- Condition #3: The weighted average holding time is greater than 3 Years.
In case all of the above conditions are met by a stock, you can decide to sell (book profit) only a part of the holdings. Sell only that much quantity that will bring the weight of the stock below the threshold limit of 5%.
Now, after you have sold, what shall be done with the sale proceeds?
I’ll suggest to keep it in your bank account. It is not necessary to invest it immediately. But it is extremely critical to reinvest 100% of the booked profits back into the portfolio (may be at a later time).
Where to invest? You can wait till the price of the stock, where you have applied rebalancing, corrects at least by 5-7%. You can put the money back into it.
In case you do not want to wait, apply the same rule as in step #1. First, apply the rule of 1M, 3M correction, dividend yield, and P/E ratio to your portfolio stocks. If a stock, which is already in your portfolio, attracts your attention, put your money in it. Otherwise, you can also apply this screening rule to your whole watchlist.
Remember, try not to increase the number of stocks in the portfolio beyond 20. You must also try to allocate the sale proceeds into the same stock where you have applied the rebalancing rule.
Step #5: Reinvesting the Dividend
This is the last rule, but it is more powerful than we can imagine. I’ll explain how.
Before you apply this rule, you will have to maintain a record of how much dividend each stock has paid you in the past. You must also ensure that all dividends paid, no matter how small the amount, should not be spent elsewhere. It must be used to buy more of its stocks.
For example, suppose you have a stock like ‘Embassy Reit’ which pays very good dividends. At its current price of Rs. 433, its dividend yield is 5.36%.
Suppose, over time in the last 4 quarters, Embassy Reit has paid you Rs. 5,000 in dividends. As your threshold for investing in a stock is Rs. 6,500, you add 2,500 from your savings.
Now, use this Rs. 6,500 to buy Embassy Reit shares. Let’s say you bought 17 stocks of Embassy Reit at the current price of Rs. 433 (after considering other costs like brokerage, etc).
How will you record this transaction? This is most important. As you have paid only Rs. 2,500 from your pocket, your cost of purchase of 17 shares will not be Rs. 7,500 but only Rs. 2,500.
Why so? This is an accounting trick that will motivate you to reinvest 100% of your dividend earned. This method of accounting will dramatically enhance the CAGR of your holding stocks.
Pro Tip: As a long-term investor, what is the main purpose of building a stock portfolio? To benefit from the power of compounding over time. How to benefit from it? In two ways: by holding on to our stocks for the long-term, and also by enhancing our CAGR.
This method of dividend reinvestment and accounting will substantially lift the CAGR of your holdings and also of the overall stock portfolio.
Conclusion
Building a stock portfolio is a very long-term process. It happens only gradually and with a lot of disciplined investing.
If you follow the below actionable steps as stated above, you will be well on your way to financial independence:
- Step #1: Constructing a quality watchlist,
- Step #2: Making patient stock selections,
- Step #3: Tracking metrics like CAGR and holding time,
- Step #4: Periodically rebalancing, and
- Step #5: Reinvesting dividends.
It’s not the size of your initial investment but the consistency and clarity of your process that compounds wealth over time.
Remember, you don’t need insider access, fat salaries, or shortcuts; what you need is a plan you can stick to and a willingness to learn from every market phase.
As I’ve experienced since 2008, the market rewards patience, diligence, and a contrarian bent when rooted in solid fundamentals.
Prioritize simplicity, limit your picks, focus on what you understand, and avoid the noisy expert advice that’s detached from real-world constraints. Let your portfolio evolve slowly, with each buy and rebalance driven by logic, not emotion.
Have a happy investing.
