Building a Solid Portfolio: Using an Index (THE CAC 40 INDEX)Hello,
Embarking on the journey of creating a portfolio of stocks can be both exciting and challenging. One strategy that many investors consider is using a well-established index as a basis for their portfolio. In this article, we will explore the steps involved in building a portfolio with the CAC 40 Index, a benchmark index representing the 40 largest stocks listed on Euronext Paris.
Step 1: Understand the index.
Understanding an index is very key since it creates the thesis of why you should consider using it. In our case, the simplest definition of the CAC 40 index is as below
The CAC 40 is a benchmark French stock market index. The index represents a capitalization-weighted measure of the 40 most significant stocks among the 100 largest market caps on the Euronext Paris.
2: Define your investment goals
whether you are looking at strong companies that will provide consistent dividends for you or strong companies that will easily deliver price appreciation for your stocks will be very key in your next move.
Understanding your risk horizon & tolerance is also very important at this stage.
3: Understand the components of the Index.
The CAC 40 has 40 companies as its components. The companies are as follows;
Air Liquide, Airbus, Alstom, ArcelorMittal, Axa, BNP Paribas, Bouygues, Capgemini, Carrefour, Crédit Agricole, Danone, Dassault Systèmes, Edenred, Engie, EssilorLuxottica, Eurofins Scientific, Hermès, Kering, L'Oréal, Legrand, LVMH, Michelin, Orange, Pernod Ricard, Publicis, Renault, Safran, Saint-Gobain, Sanofi, Schneider Electric, Société Générale, Stellantis, STMicroelectronics, Teleperformance, Thales, TotalEnergies, Unibail-Rodamco-Westfield, Veolia, Vinci, and Worldline
4: Research Individual Companies
Once you have a sense of the companies you want exposure to, delve into the individual companies. Conduct thorough research on each company, considering factors such as financial health, earnings growth, competitive positioning, and management quality. This step is crucial in identifying the specific stocks you want to include in your portfolio. This will greatly help you in selecting the great companies among the components. We will look at 1 company among the components of the CAC 40 & you can try and look at the rest.
The company we shall explore is DANONE . Below is its chart to show its historical price move
Next understand what the company does: Danone SA engages in the food processing industry. It operates through the following geographical segments: Europe; North America; China, North Asia & Oceania; and Rest of the World. . This data can be found on Tradingview via link www.tradingview.com
Next understand the financials of the company: The same can be interrogated on the link shared before. The most important metric is the Income statement because it shows you where the company derives its value from in form of income. It also will tell you how the company spends its money. You cannot however ignore the Balance sheet and the Cashflow statement. www.tradingview.com
Once you have an understanding of the company as a whole now its key to look at structure to understand and pick great entry points. This is where we begin structure drawing and identification of patterns.
Here is the link with clear Impulses & corrections.
Very key for you to note is that the price is in a correction and close to where the 1st target would be. This tells us even though this might be a great company from all other metrics, it might not be a great company to buy from the current point. Now that we have looked at the Danone company, back to our CAC 40 index.
5: Research on all other companies that make the index.
By following these above steps, you can construct a well-rounded portfolio that aligns with your financial goals and risk tolerance.
All the best in your investment journey.
