The 10 Things You Must Know Before Making a Stocks Portfolio
• Here is a crash course of the 10 things any investor must know before considering constructing a stock portfolio.
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Portfolio Re-Allocation
• An important factor for any investor is the amount of time you allocate to manage your portfolio. Are you planning to buy and sell stock every week, or perhaps only make a couple slight changes once a year? There is no right or wrong answer here. However, if you are an inexperienced investor, you should start with longer term investments (which is called value investing).
Portfolio Size
• The second most important factor is the size of your portfolio, which is your number one tool for creating diversification. A portfolio of two stocks is not really a portfolio, and a portfolio of 500 is not manageable for one person. How often you will re-allocate your portfolio’s equity is also an important factor for size. If you want to be very active with your portfolio you might want to consider a smaller one consisting of 5-7 stocks, and if it is for long term you might want to consider 15 solid dividend stocks and hold them for an extended period of time.
Diversification
• Diversifying your portfolio to reduce risk is crucial in the art of portfolio management. Systematic risk or market risk is something unavoidable, and generally when the entire market goes down so will your portfolio. However, all other risks can generally be reduced to nothing. Mixing between industries, sectors, markets, exchanges, countries, company sizes, management style and many other factors will ensure your portfolio is resilient to any one category performing poorly.
Understanding Risk
• You might have heard that more risky assets yield higher returns, something that the scientific community recently contested. A well-managed portfolio does not always have to avoid risky investments, but it should never rely on them for profitability. Make sure long shot investments represent only a small part of your portfolio (say 10%) which you never deviate from.
ETFs
• ETFs are baskets of stock you can buy, which allow you to access financial assets you would otherwise could not. For example, the SPY is an ETF designed to mimic the S&P500, something a private investor could not achieve alone. But, by investing in SPY you affectively spread your equity into 500 stocks at once. Furthermore, ETFs allow you to invest in foreign markets and financial instruments that would otherwise be very difficult to invest in (due to low liquidity or entry barriers) or would incur very large costs.
Trading Costs
• If you plan to adjust your portfolio often, beware of the costs of doing so. Deciding to change from one stock to another means you will now have to cover the cost of selling the active stock, buying the new one, and eventually selling it again when you want your profit. It is easy to underestimate these costs, and a good broker such as Interactive Broker can help you reduce that cost significantly in comparison to other options.
Research
• Don’t just follow any advice you hear online! Make sure you research your potential investment well. Any material you read should list both the risks and opportunities of an investment. TipRanks scores and ranks all analysts and bloggers to make sure you are never following the advice of someone will lose your money.
Time
• There is no such thing as get rich quick. You should forget about 80% annual returns and aim for beating the S&P500 index or matching it. A 10% average annual return seems little, but after the effect of compounding for 30 years that will not amount to 360%, but to 1644%! That means your initial portfolio of $25,000 is now worth $436,235. Investing is not a race, it is a marathon – pace yourself and set realistic expectations.
Avoid Financial Scams
• New investors tend to be attracted to the abundance of scams online, which prevent them from actually building a constructive profitable investment style. This is not to say that there are only bad services, but the good ones usually don’t come cheap. Some solid services to consider are TipRanks, Seeking Alpha, Bloomberg, MorningStar, and Forbes.
Have Fun
• You are likely reading this guide because you are not a professional investor and are thinking of picking it up as a hobby. If this is the case then make sure you enjoy doing it.. If you believe Tesla will make the world a better place by making cars electric then by all means invest in it. If you believe green energy is the future then allocate a part of your portfolio there. If you hold a company you think is of great value but does not meet your ethical standard anymore, sell your shares and find one that does.
• While these are the key points to look at, you should always continue to investigate and learn. If you are still not comfortable with your investment knowledge then by all means you should consider a good investment strategy advisor who will handle the difficult decisions for you, leaving you with more time for the fun part of investing.
