stocks requires research, time and the ability to evaluate many parameters for the stock, industry and overall economy.
But building your portfolio may not be as difficult as you imagine. While it seems like an impossible feat at first, with consistent management and dedication of your stock portfolio, your financial future can be enhanced.
Many people get caught up in the first steps of building their stock portfolio. With a bit of research and some guidance, these first steps can be easier to accomplish. This course attempts to help you through those crucial initial steps.
Portfolios are combinations of assets. Portfolios consist of collections of securities. Traditional portfolio planning emphasizes the character and the risk-bearing capacity of the investor.
For example, a young, aggressive, single adult would be advised to buy stocks in newer, dynamic, rapidly growing firms. A retired widow would be advised to purchase stocks and bonds in old-line, established, stable firms, such as utilities.
Modern portfolio theory suggests that the traditional approach to portfolio analysis, selection, and management may yield less than optimum results.
First of all, consider three parameters when choosing stocks. Equity must have a strong management team with a proven track record of sticking to their strategies, timelines, and execution.
Secondly, it should have a line of products or services that appeal to its core customer base, with a market size to allow long-term growth.
And third, the company must be making a unique product or providing a unique service that would allow profit margins to remain high.
Companies with both good management and sustainable competitive advantages can be pillars of your portfolio and could help you soundly beat the market over the long term.
If some stocks don’t fit the qualifications listed above, you’ll pay a big price for the decision to hold for years on end.
Follow these 4 steps to building a strong stock portfolio:
Assess your risk tolerance
What are your future needs for capital? What are your tax concerns? Answer these questions before moving forward.
Before you put your money into an equity fund or public company, you’ll want to iron out what your goals are. This will further help you assess your risk toleranceIt’s important to understand what kind of investor you are before you begin investing. If you have lots of time and nerves for stress, you’ll be able to participate in high-risk investments. If you are averse to a great deal of risk, you may want to consider putting your money in a sure thing.
Determine your asset allocation
Asset allocation is simply a term meaning where you put your money. Where you put your money is separated into groups and percentages. For example, how much money you put into stocks, bonds, and cash. If you wish to avoid risk, you should expect to put most of your money, roughly half, into bonds. The rest should be evenly divided between stocks and cash.
A very aggressive investor, for example, may have 80% of their investments in stocks. There’s a great deal of financial software that can help you estimate your asset allocation.
Study stocks you want
After determining the asset allocation that best meets your financial needs, you have to become educated about investing.
The knowledge about the different types of stocks is crucial to your understanding of the stock market, and, therefore, your investment.
To quote, Warren Buffett said, “Risk comes from not knowing what you are doing.” In other words, knowledge is the key to getting returns. There are two main categories for stocks: preferred and common. Preferred stocks pay out dividends to their shareholders. Most stocks are common (meaning, they don’t pay dividends).
Common stocks can be further subdivided:
Growth stocks: higher risk stocks based on strong growth projection.
Value stocks: stocks that are currently undervalued by the market.
Blue-chip stocks: stocks that consistently perform.
Speculative stocks: stocks purchased based on speculation from investors.
Assess again your portfolio
The tricky part of building a profitable stock portfolio is consistent management and analysis. Adjusting your asset allocation, reassessing your risk tolerance, and further educating yourself about the stock market will help you as you continually examine your investments.
The whole process of building a portfolio should be in SEVERAL STEPS:
STEP 1: Define why do you want to invest or trade. Your purpose is very personal. If you thought saving and investing meant the same thing, you were wrong. Savings are the unutilized part of your income. Only when you put your savings partially or entirely into an investment instrument, it qualifies as an investment.
STEP 2: Be realistic about your appetite for risk. Most of us know how much we have saved to date but very few of us have a realistic understanding of how much risk we’re willing to take on to achieve our financial goals. Your risk appetite will depend on your age and financial responsibilities.
STEP 3: Understand the relationship between risk and return. Risk and return are directly proportional to each other. Higher the risk involved, higher is the return and vice versa. For example, you have promises higher returns compared to fixed deposits, but it also comes with a relatively higher risk.
STEP 4: Create a contingency fund. Honestly speaking, this has to be the first. Before you invest or trade anywhere, you must create a contingency fund for those rainy days. A contingency fund worth six months of your current income is good enough to keep you from dipping into your investment funds.
STEP 5: “If you don’t know where you’re going, you’ll miss it every time.” – baseball philosopher, Yogi Berra. That means, you know your purpose for investing, but do you know what it will cost to achieve that purpose.
STEP 6: Invest with a plan. The most successful portfolios are assembled based on a solid understanding of the fundamentals of the individual securities that comprise the portfolio. The portfolio should also factor risk tolerance into the balancing discussion.
STEP 7: Give it time. While there may be some investment choices that you hold for shorter periods of time than others, overall, maintaining the long view should deliver consistently positive returns.
And general advice: TRY NOT TO BE OBSESSED! Markets can be volatile from day to day, even month-to-month, never mind hour-to-hour especially the market of cryptocurrencies. But over longer periods of time, volatility subsides. Build your portfolio and let it run.
Investing is continual. Your investments need maintenance in order to be effective. Your financial needs and goals are bound to change. You’ll need to respond to that change by being open to new ways to save and earn for your future.
It’s important to remember that building a stock portfolio is building a better financial future.
Building a profitable stock portfolio can be an immensely rewarding and enriching experience. And you’ll be able to navigate the initial steps of creating a diversified portfolio.
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