You can diversify and reduce the risk of your investments by building a sound stock portfolio — a collection of assets that includes stocks, bonds and exchange-traded funds (ETFs).
Anybody can build a successful stock portfolio with the right strategy. But you have to incorporate certain steps and maintain the portfolio. In this guide, Benzinga provides a step-by-step strategy to build your stock portfolio.
How to Build a Stock Portfolio
Covering all your bases when building a stock portfolio increases your chances of growth. You have to analyze key aspects and incorporate them into the strategy that suits you best.
Step 1: Choose Your Investment Format
You can build a portfolio in several ways.
Self-directed
If you’re a do-it-yourself investor, self-directed investing allows you to trade stocks. You have to open a self-directed brokerage account, enabling you to choose the stocks for your investment portfolio.
The advantage of this account is that you decide when to buy and sell stocks. The disadvantage is that you don’t have a professional to guide you.
Automated
Some investment companies provide robo-adviser portfolio management. It is an automated service that relies on computers, instead of financial advisers, to build and manage your portfolio.
Investment companies use algorithms and variables such as the investor’s age, income and risk tolerance to preprogram trading decisions. This service provides automatic rebalancing — reallocating your portfolio to balance it and reduce risk.
Broker
Opening an account with a broker or investment adviser to build a stock portfolio is the easiest method. It’s mostly suitable for new investors or those who don’t have time to manage a portfolio. The broker or adviser builds and manages a stock portfolio based on your profile.
Investors enjoy the convenience of having a licensed professional manage their portfolio. But they have to pay broker fees. The risk is that the broker’s portfolio management determines the investor’s growth.
Hybrid Market
A hybrid market enables traders to use automated trading systems and floor brokers to execute transactions on an exchange. The New York Stock Exchange (NYSE) is an example of a hybrid market. This investment method is suitable for large institutional clients and high-net-worth individuals.
Floor brokers executing trades are slower and more expensive than an electronic system. But the main perk is that they use judgment to time trades. Most hybrid markets are moving away from floor brokers and toward electronic order fulfillment.
Step 2: Choose an Investment Style or Strategy
Whether your investments are self-directed or through a broker, you’ll have to determine a portfolio strategy. You should consider factors such as risk tolerance, return expectations and liquidity requirements.
Your age plays a crucial role in determining the strategy. Young investors can opt for high-risk investments as they have more time to rectify mistakes than investors nearing retirement. Your income amount and its stability will also determine your risk appetite. High-earning people can take bigger risks than low-income earners.
You also want to consider your motivations for investing — is it quick profits or to increase your net worth through long-term investing? The type of assets you choose will determine some aspects of your strategy. As an example, certain online brokers allow you to add crypto and stock to your portfolio. Cryptocurrencies, for example, are highly volatile and contain a lot of risks.
Managing a portfolio requires time and expertise. Determine whether you have both. If not, a broker might be your best option.
Brokers also come with risks such as an underperforming portfolio and high fees. Your selection of assets and brokers determines how quickly you can liquidate assets. Make sure that the liquidity and withdrawal period align with your goals.
Step 3: Create Goals for Your Portfolio
Everybody invests for different reasons. Some investors want to grow their wealth while others want to use the profits for a purchase, such as buying a house.
You need to know your investment goals. That’s important because it determines the time and money you need to reach the goal. You have less time to save for college, for example, than for retirement.
Your goal gives you an idea of whether it’s achievable. Investing several hundred dollars per month for 10 years is less likely to make you a millionaire than allow you to buy an expensive car.
Step 4: Select a Diverse Array of Investments
You don’t have to limit your portfolio to stocks. Besides choosing individual stocks across different sectors, you can venture into other assets such as real estate.
Varying Industrial Sectors
Stock investors avoid putting all their eggs in one basket by investing across various sectors. Some sectors in the economy are dependent — a rise in energy costs may result in a decline in the materials sector. To avoid investing all your funds in a declining industry, choose stocks across several sectors.
REITs
You can invest in a publicly traded real estate investment trust (REIT). Other options are to buy shares in a REIT mutual fund or exchange-traded fund (ETF). About 145 million Americans have invested in real estate through REITs, many accessing them through mutual funds in their 401(k)s and pension plans.
Index Funds
An index fund tracks a market index, usually made up of stocks and bonds. Investing in an index fund is simple and usually comes with low fees.
Crypto-Focused Stocks
Investing in crypto stocks can complement your crypto holdings and spread the risk across different sectors. Several blockchain stocks have risen significantly in the last few years.
Alternative Investments
Further minimize your risk by buying bonds, cryptocurrencies and real estate. Other alternative investments include art and wine. An all-weather portfolio may endure as the volatility of one asset that drops is offset by a rising asset. To achieve that balance, your portfolio should consist of several assets.
Step 5: Rebalance Your Portfolio as Needed
Successful investing means buying low and selling high. An increase in assets that you haven’t sold is unrealized profit. You sell the assets to realize the profit. Investors do that to lock in profits and adjust the weight of the different assets in their portfolios.
That’s known as rebalancing a portfolio. The best investors don’t hold a stock forever. They liquidate it to make a profit before the stock loses value. When they feel that the price of the stock they sold is low, they may buy it again.
Benefits of a Stock Portfolio
Building a stock portfolio allows you to enjoy several benefits.
Planning For Retirement
Investing in stocks is a convenient and simple way to ensure you enjoy a comfortable retirement. Your portfolio shows you the average annual return. That enables you to determine whether you should contribute more to reach your goal.
Saving for the Present
Unforeseen circumstances happen, and stocks serve as a safety net for rainy days. Even if you don’t have reserves, deciding to build a portfolio prompts you to begin saving immediately.
Stocks Are Liquid
You can easily convert your stocks into cash in a short period if you have an emergency. Otherwise, you might feel that the stock price is high and it’s time to sell. Buyers are usually available to purchase your stocks.
Easy to Understand
Even beginner investors understand that when a listed company exceeds revenue expectations, its stock price may rise. And if the company is involved in a scandal, its stock may plummet.
Do Investors Need Assistance with Stock Portfolios?
It’s not only beginners who seek investing assistance; experts work with advisers to have an advantage over other investors.
Brokers Offer Guidance
Some brokers have access to information unavailable to many retail traders and beginner investors. They can steer their clients in the right direction and help with portfolio management.
Brokers Educate Consumers
Besides offering a trading platform, many online brokers provide educational tools. Some brokers have a knowledge base that consists of videos, articles and newsletters that teach consumers about trading and the markets.
Platforms Like Benzinga Offer Financial Information
Benzinga’s website contains free information about everything you need to know about stocks and other assets. Serious investors who want an edge over others need a wealth of information available on Benzinga Pro.
Advisers Can Help Consumers Build Larger Portfolios
Financial advisers have the expertise and time to help you manage risk and increase growth by expanding your portfolio.
Compare Stock Brokers
Finding a stockbroker that can help you diversify your portfolio and protect it from volatility is time-consuming and risky. Benzinga has made the search easier by connecting you with reliable brokers.
Financial Success
Building a diverse stock portfolio is important for investors to manage risks and achieve financial security. While self-directed investing offers autonomy, it may lack the expertise of a broker. Investing across different sectors and regularly rebalancing the portfolio is crucial for long-term success. Resources like Benzinga and financial advisers can provide valuable market insights to help investors create a strong and growth-oriented portfolio for various financial goals.
Frequently Asked Questions
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A diverse stock portfolio consists of a broad mix of investments. You invest in stocks across different sectors and buy different assets such as bonds and real estate.
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Some brokers don’t have a minimum requirement. You can open an account without funding it. If you start with an initial investment of $1,000 and contribute $100 monthly, you’re on the way to building a stock portfolio.
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A balanced portfolio is important for managing risk and increasing returns. It involves diversifying investments across different asset classes to minimize the impact of one investment’s performance. This protects against market volatility and losses. A balanced portfolio is tailored to an individual’s risk tolerance and goals, aiming for stable and consistent long-term growth.
