June 4, 2018
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 article attempts to help you through those crucial initial steps.
Follow the 4 steps below to build a stronger stock portfolio:
1. Assess your risk tolerance
It’s important to understand what kind of investor you are before you begin investing. If you have lots of time and a stomach 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.
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 tolerance. What are your future needs for capital? What are your tax concerns? Answer these questions before moving forward.
2. Determine your asset allocation
After assessing your needs, you’ll need to determine your asset allocation. Asset allocation is simply a term meaning where you put your money. Where you put your money is broken into groups and percentages; how much money you put into stocks, bonds, and cash.
If you are conservative and 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.
As you grow more aggressive as an investor, cash and bonds should represent a smaller fraction of the pie. 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.
3. Study stocks
After assessing your risk tolerance and determining the asset allocation that best meets your financial needs, you’ll want to become educated about investing.
Becoming educated about the different types of stocks is crucial to your understanding of the stock market, and, therefore, your investment. As Warren Buffet has said, “Risk comes from not knowing what you are doing.” In other words, knowledge is key to getting returns.
There are two major categories for stocks: preferred and common. Preferred stocks pay out dividends to their shareholders. Most stocks are common (in that, 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.
4. Reassess 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.
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.
Building a profitable stock portfolio can be an immensely rewarding and enriching experience. With the right amount of dedication, you’ll be able to navigate the initial steps of creating a diversified portfolio.
It’s important to remember that building a stock portfolio is building a better financial future. Investing your money into public companies, private equity firms, or municipal bonds can do more than pay out dividends, they can help spur growth in your local economy, provide you with a sense of engagement with your finances, and help build a blueprint for your financial future.
Dr. Diane Schleier-Keller is a business strategist and finance columnist. She has 3 years of experience in M&A and has been traveling the world to help train entrepreneurs to succeed in their business. You may also connect with her on Twitter.