Imagine you find yourself with a sizeable lump of cash.  You’ve decided that you want to use that cash to build a portfolio of defensive shares for both capital gain and dividend income.  How could you get started building such a portfolio?

I get asked this question quite a lot because unless you have a system for making buy and sell decisions, it’s not obvious where, when or how you get started.

I’ll assume you already understand the basics of the stock market, i.e. that you’re buying (a share of) a company through something called the “stock market”, which is just like a market for anything else, whether it’s cars, houses or antiques.

I’ll also assume you have an investment strategy in mind, whether that’s defensive value investing or something else.

Armed with that knowledge, here are a couple of approaches you could use to create your new portfolio:

The fast approach

With the fast approach, your goal is to buy all your new investments in one big hit.  If you’re looking to offload existing investments that don’t have a single theme or strategy behind them, you would do that first.

The fast approach is popular with buy-and-hold investors, and from that point of view, I can see the sense in it.

With buy-and-hold, there are no ongoing buy or sell decisions to be made, other than if one of your holdings goes bust, gets taken over, or otherwise ceases to exist.  A buy-and-hold investor is typically looking to minimise the amount of time they spend thinking about buying shares while maximising the amount of time they spend holding them.

But just how fast is fast?  What sort of time scale are we talking about here?

Let’s assume it takes eight hours to fully review a company and come to the conclusion that you want to buy it.  Some people might have all day to spend on their investments, but most probably have less than 2 hours in the evening.  At that rate, it’s going to take four days during the week to review a company, or perhaps a couple of half days at the weekend.

If you’re doing a thorough job of reviewing each investment – thorough enough so that you understand the company well enough to have the faith and belief required to stick with it through thick and thin – then it’s probably going to be hard to buy more than two companies each week.

If you’re looking to hold a diversified portfolio of 30 companies as I do, that’s 15 weeks to build a portfolio from scratch, at the very least.

Of course, you could buy 30 stocks in a couple of days.  You could even do it in a couple of minutes if your analysis consists of throwing darts at a list of stocks pinned to a dart board.

But if you’re interested in building a good portfolio rather than just any old portfolio, I can’t see it taking less than a few weeks at a minimum and, in most cases, a lot more.

So that’s the “fast” approach, where you’re still likely to need a few weeks to put together a solid portfolio.  What’s the alternative?

The slow and steady approach

Given that you’re likely to spend a few weeks getting a portfolio set up, why not turn that to your advantage?  After all, you’re going to be living with this portfolio for years and possibly decades, so what’s the rush?

Slow and steady is the approach I would use.  That’s because investing is not about making fast decisions; it’s about making good decisions.  So what does slow and steady actually mean in practice?

First of all, the slow and steady approach means planning out your buying and selling dates in advance. 

It could mean, for example, researching companies for an hour or so each evening and coming to a final conclusion at the weekend.

This would limit you to one purchase per week at the most, although I would prefer to go slower than that.

If I had enough cash to create a 30-stock portfolio in one go (which would need to be at least £30,000, in my opinion, so that stock broker fees aren’t an excessive drag on performance), I would probably place one trade every other week.  At that pace, it would take me more than a year to get fully invested.

There are a few reasons why I prefer this slower approach, mostly because it helps you to be:

• Patient and disciplined – These are probably the two most important traits for investors.  The more patient and disciplined you are, the better.
• Alert but detached – A sense of detachment is surprisingly helpful when everything appears to be going wrong with one of your investments.  By adding investments just once every two weeks, you’re more likely to forget about the stock market on a day-to-day basis, which is usually a good thing.
• Focused on the long-term – Investing really is about years and decades rather than weeks and months, so having a build-up phase that takes over a year is a good way to get used to the idea of thinking on that time scale.

But the main reason I like this slow, steady approach is that I use much the same process to maintain portfolios after they’ve been built up from scratch.

Unlike buy-and-hold investors, I think portfolios do best when they’re actively worked on, like a garden or a classic car, or essentially anything that degrades over time.  And static portfolios do degrade over time.

Some companies will go into decline while some shares will increase in value too fast, reducing their dividend yields.  For many different reasons, a portfolio that starts out well can falter if it’s left unattended.

So rather than buy-and-do-nothing, I prefer to actively prune my portfolio to keep it in tip-top condition.  Typically that will mean either selling shares that have increased “too fast” or selling companies that are in long-term decline (which, of course, I try to avoid by sticking with high quality stocks in the first place).

The process I use to maintain a portfolio is to methodically trim the fat out every month, selling the weakest link one month and replacing it with something better the following month.

This is a nice, slow and deliberate pace as it only replaces 20% of the portfolio each year (6 stocks sold out of 30).

It should be relatively easy, both psychologically and behaviourally, to move from a build-up phase of buying one company every other week to a maintenance phase of buying or selling one company each month.

Investing is a marathon, not a sprint

It’s important to pace yourself.  If you’re in this stock-picking lark for the long haul, then you have to pace yourself.  Yes, it can be like watching paint dry or grass grow, but that’s okay; you don’t have to watch it.

When it comes to my garden, I just pop out on a Sunday, cut the grass and then go and do something else with the rest of my week.

Building and maintaining a portfolio of shares can be done in much the same way.