Building a Stock Investment Portfolio
June 9, 2011
Most people buy stocks to earn returns that are higher than what they would earn on fixed income or cash investments. However, owning stocks does involve risk. Your company’s stock may fail to perform as well as you hoped or the overall market may decline and take your stocks down with it. To reduce these risks and to try to maximize the returns on your stock investments, it makes sense to build a portfolio of stocks carefully.
There are no guarantees with stock investing, but here are four issues to keep in mind:
- What portion of your assets should be in stocks?
- How many stocks should you own?
- How do you choose the stocks to buy?
- When should you buy them?
How you divide your total portfolio into stocks, bonds and cash investments* will influence your total returns greatly. Over the long-term, stocks have provided the best returns with the greatest risks. Bonds provide steady income and should provide for the return of your principal on maturity. Cash investments, like savings accounts, treasury bills and CDs, have more liquidity and the lowest risks, but usually with the lowest returns over time.
Your asset allocation should be based on your time horizon and your tolerance for risk. Generally, the longer your time horizon and the greater your risk tolerance, the greater portion of your investments you should consider for stock investing. However, even young investors should remember that stocks do not always go up. This is especially important if young investors may need the funds for some other purpose like buying a home or funding a college education.
How many stocks?
There is no absolutely right answer. You should own a diversified portfolio that gives you exposure to the overall market. Doing homework when selecting them and following them after buying them is an important benefit of using a financial advisor. You should also make sure to have stocks in a variety of industries so a slow-down in one segment of the economy does not ruin the return of your total portfolio.
One rule of thumb to consider is to own at least 3 or 4 stocks in at least 4 or 5 industries. This will give you relatively broad exposure and should not be so cumbersome that you cannot stay aware of what is happening with each company.
Again, there is no absolutely right answer. Investors and mutual fund managers spend all their professional lives trying to choose the stocks that are going to perform well. Some are more successful than others.
Ultimately, the value of a stock is determined in the open market by what other investors are willing to pay. Their opinions are most likely influenced by their perception of how the underlying value of the company is going to change in the future. In other words, stock in companies whose income is expected to rise should be more likely to rise in value over time. Therefore, the key is to identify companies that are going to be successful. Unfortunately, that process in not always easy.
Hometown Investment Services can help in this process and offers goal-focused strategies for a diversified portfolio.
When to buy
It is easy to say, “Buy just before stocks are going to rise.” Unfortunately, no one can accurately predict the short-term direction of the stock market or individual stocks. To deal with this uncertainty, consider spreading your purchases over time, perhaps 4 to 6 months. That way you can avoid putting all your funds to work at the top of a market cycle. If the market goes down, you will end up with a lower average cost. If the market goes up, you will have missed some profits, but hedged your risk.
Building a stock portfolio takes time and effort. Contact the investment professionals at Hometown Investment Services to review your investment strategies of building a successful future of financial security.
*Available through Hometown Investment Services, Inc., a wholly-owned subsidiary of Home Federal Bank. Investment and insurance products are offered through Fintegra Financial Solutions, an independent registered broker dealer, member number FINRA/SIPC, OSJ phone 763-585-0503. Hometown Investment Services and Fintegra are not affiliated. Investment and Insurance Products offered through Fintegra: • Are NOT Bank Deposits • Are NOT FDIC Insured • May Lose Value • Are NOT Insured By Any Government Agency • Carry NO Financial Institution Guarantee
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