A stock portfolio is a collection of stocks that you invest in with the hope of making a profit. By putting together a diverse portfolio that spans various sectors you’re able to become a more resilient investor. That’s because if one sector takes a hit, the investments you hold in other sectors aren’t necessarily affected.
Building a portfolio
When assembling a stock portfolio, it’s important to have your goals in mind beforehand. That way your decision-making process is guided by reason as opposed to emotion. Alternatively, you may be compelled by your emotional attachment to particular brands to not only invest but to hold onto investment past the point where it makes sense to do so just because you like the company or because you feel like you’ve given too much of yourself over to your investment. The latter is known as the sunk cost fallacy. This fallacy describes holding onto investments or projects longer than it makes sense because you feel you’ve invested too much to turn back.
Identify goals and timeline
Your investment strategy should incorporate aspects of your personality. If you’re generally anxious and watching your stocks closely, you may be better off making investments in less volatile companies. You should also consider how long you intend to hold onto your stocks. The market has a historically upward trend, which makes it a great bet for long-term investment, but in the near-term, you can expect natural fluctuations in the market.
Consider your risk-to-reward profile
How much risk you’re able to withstand depends not just on your stomach, but on your finances as well. If you’re early into your investing career, you can ride out a loss better than when you’re older if only because you have more time to recoup your losses.
What are your investing goals?
Start with answering this: why are you investing? Is it to put a down payment on a large purchase? Is it retirement? A financial safety net? It makes more sense to put your financial safety net into a retirement fund like a Roth IRA rather than into savings because with a Roth IRA your savings will grow. Also, since your deposits are made after taxes, you can withdraw at any time without penalty.
Meanwhile, if your financial safety net is simply waiting in a savings account it may actually depreciate in value over time due to inflation, which is the process of a currency’s purchasing power going down over time relative to the cost of goods. Putting your savings into the stock market makes sense because your investment will grow over time. Although, again, over the short term you can expect fluctuations.
How do my financial realities play a role?
Investment is a good idea, but it must fit into a larger financial plan—and the realities of your present and future finances will play a major role in how you execute on that plan.
Ask yourself: How likely are you really to earn a high income? And what’s the true possibility of a significant inheritance falling into your lap? If either of these options are likely, then looking into a brokerage firm of some sort may be a good idea.
Keep in mind how much time you have to conduct all the necessary research to invest wisely. If the sum of money you’re dealing with is large enough, then hiring a financial planner may be a good idea. If the sum is smaller, then a portfolio of blue-chip stocks (stocks with name recognition and a history of reliable returns) may work for you as a medium-term investment.
Public, for example, makes it possible to assemble a diverse portfolio of companies you believe in by offering the ability to buy stocks in slices. This means that investors need not pony up the full share price for 1,000s of public companies, instead opting to make micro-investments ($5 or $10, for example) that can be increased over time.
What are the typical risk vs. reward stock portfolio types?
The different categories of stock portfolios are classified by the type of investment strategy that they serve. The portfolio style that’s best for you will depend on your risk tolerance; how much time and money you can dedicate to monitoring and building your portfolio; and how long you want to keep your money in your investment.
A growth portfolio is one that’s expected to grow faster than the rest of the stock market. Growth portfolios carry the greatest risk.
An income portfolio is one that’s expected to generate a reliable return with little risk.
A conservative portfolio is focused on growth while carrying more risk than an income portfolio.
What are typical stocks in a portfolio?
There are several types of stocks that you can invest in. They are categorized based on their risk, return on investment, and volatility. The stocks you choose will depend on your risk tolerance, investment style, and the quality of your research.
Growth stocks are stocks that are expected to climb in value quickly relative to the rest of the market. They’re a riskier investment because there’s always the possibility that they won’t grow and may even flounder. Startups are frequently growth stocks.
Income stocks, also known as value stocks, provide better dividends than other companies. A dividend is a percentage of a company’s profits that is paid to investors.
Cyclical stocks track the overall quality of the stock market. When the market does well, so do cyclical stocks; when the market does poorly, so do cyclical stocks. Examples include airlines, banks, and construction companies. They’re a riskier investment because the market is prone to short-term volatility, but if you purchase them at the right time then they will provide a favorable return.
Speculative stocks belong to fledgling companies with unknown futures. A startup is an example of a speculative stock. They are considered higher risk investments.
With so many different types of stocks to choose from it’s important to do both research and cultivate self-awareness. That way you know both what to invest in and what you can handle investing in. Not everyone has the stomach for riding out the ups and downs of the market, so cyclical companies would not be as good an investment as income stocks. As it said above the Greek Temple of Apollo at Delphi, “Know thyself.” The saying should occupy the same space on your wall as the “Hang in there” kitty poster.