Over the last few years, we have seen unprecedented volatility in the stock market. The S&P 500 has rocketed to from 800 to 1500 and back more than once over the last 15 years. For the best odds of long term gains, it is important to make smart investment decisions and build a diverse portfolio.
Build a Portfolio for the Long Term
The markets have good days and bad days. It is important to build a portfolio no matter what the markets are doing. In the long run, daily gains and declines don’t matter. All that matters is how your investments fare over the long-term horizon.
Day trading is just like taking your retirement fund to Las Vegas and letting it all ride on black. You may double up your money, but you are just as likely to lose it all.
Every time I buy a stock, I follow Warren Buffet’s strategy. I try to find solid companies with a stable outlook for the future. Value investing is all about finding companies that are undervalued and have strong growth potential.
Diversify
Remember to diversify your investments. If you are only invested in one stock or one industry, you are not diversified. Even some mutual funds are not diversified, as they target one type of investment.
To ensure you hedge against losses, it is important to have more than one stock. If all or a large portion of your portfolio is in one stock, and that company has bad news or poor results, your entire portfolio will go down. If each stock represents 10% or less of your portfolio, you only have a small portion at risk if one stock has bad performance.
The same goes with industries. If all of your stocks are in the airline industry, auto industry, oil and gas industry, or technology industry, and that industry has a problem, your entire portfolio will be impacted. You don’t have to go far into history to see when the dot com stocks all took a turn down together.
When building my portfolio, I chose to start with solid, blue chip stocks like Walmart, General Electric, and the Coca Cola Company. I also branched out with investments in companies like Boeing and Phillip Morris International. I didn’t have a big portfolio on day one. It took time to save and invest in a larger group of companies to achieve better diversity. I’m not done, and never will be. It is always important to keep your eyes on your stocks and try to understand the outlook of the companies you in which you invest.
Building a Portfolio of Single Stocks Isn’t For Everyone
Anyone can buy and sell stock in individual companies, but it isn’t something everyone wants to do. Some people are worried about losses. Others don’t care to spend the time to make informed decisions and would rather have someone else do it. If you are not interested in buying stock, that doesn’t mean you can’t invest in the stock market.
I suggest everyone invest in a variety of mutual funds and index funds to build a solid retirement portfolio. I use Personal Capital to help manage my diversity and fees. I hold several funds from both Charles Schwab and Vanguard that help me meet my long-term retirement goals. Whether you are starting at 40 or starting at 20, make sure you are always saving for your retirement.
How to Start
If you do not have any investments yet, start by opening an account at a quality discount brokerage. I use Charles Schwab myself, but there are other great options like Fidelity, Scottrade, or eTrade. From there, learn all you can and start making good investment decisions.
If you are very new, you can read my in depth guide to how the stock market works. You should also read up on how dividends work, what a share of stock represents, and understand when to buy and sell stock.
I like saving with low cost automatic investments. You choose where the investment goes. I would start with one stock or fund that you like. Make investments into that fund at a regular rate ($50 a month? $25 per paycheck?) that you choose and will stick to. Once you hit a pre-determined investment level in that company (in dollars), you should switch to a new investment. Keep going indefinitely. Eventually you might invest more into companies you already have stock in, but never stop investing.
By the time you are ready to retire, you will have a nice nest egg to fall back on, aside from your 401(k) that is.
Originally published December 10, 2008. Updated July 15, 2013.
Building A Portfolio is a post from: Narrow Bridge Finance