How To Build Strong Stock Portfolios

If you are looking for a one size fits all article here, you will be sadly mistaken.  A strong portfolio depends in large part to the individual investor.  Someone who is older and very risk averse would consider a strong portfolio to be completely different from someone who is very aggressive and very risk tolerant.  Does that make either of them wrong?  No.  Just different.  So before you try to figure out how to build a strong portfolio, you need to figure out just how risk tolerant you are. 

However, there are a few things that are pretty generic and can help build a strong stock portfolio.  One of the biggest keys is diversification.  Most of us remember the old saying - "Don't put all your eggs in one basket."   Spending all your investment to purchase one stock or a very limited number of stocks is extremely risky.  You might occasionally hit the jackpot and make a ton of money.  However, you are much more likely to lose a lot of money betting on only one thing.  The better choice is to choose a variety of stocks.  That way if one or two sink, you haven't risked your entire investment.  Others should rise enough to more than make up for the ones that go down. 

The second big key is to separate your buy and sell decisions from your emotions.  This is MUCH harder than it sounds.  When everyone else is talking about how good a stock is, you don't want to be left out.  Often though, you've already missed the best part of the ride.  Buy stocks because they are good companies - NOT because they are getting all the attention right now.  If you can buy a good company BEFORE it gets all the good press, you just beat the crowd to the sale!  Selling should be done on the same principles.  Sell things when you feel the stock price accurately reflects what the company is worth.  Don't get caught up in the rush.  If you are doing this right, you probably won't be buying the absolute bottom and selling the absolute top, but you should be fairly close.  Make a plan and stick with it without letting your emotions override your better judgment.  Don't get carried away in the heat of the moment!

If you have a limited amount of money to invest, the best choice is often a mutual fund or index fund.  Those choices allow an investor to diversify without having a lot of money.   Someone with limited funds can actually buy a fairly solid stock portfolio by purchasing funds.  You won't have a lot of anything.  In fact, you may not even have one full share of some stocks.  But that's ok.  You've got a diversified portfolio of stocks.  Just remember, just like buying individual stocks, don't let your emotions override your better judgment of buying and selling.  Because a fund is going to follow the stocks it is composed of, it may have an off quarter or year.  But if it is a good fund, don't dump it just because it's down.  Consider that a buying opportunity. 

Again, remember that there is no one right way for everyone.  You'll have to make some decisions as to what you are comfortable with.  Diversify within your comfort zone and don't let your emotions rule your head and you should be well on your way. 


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