How to Build a Stock Portfolio: Here are 5 essential steps

Here is Stocks Down Under’s 5-step guide on How to Build a Stock Portfolio!

1. Define Your Investment Goals and Risk Tolerance

This may seem trivial, but it is still important. Investors need to consider why they are investing. Yes, we know you want to make money. But why? Do you want to buy a house? Do you want to save for a retirement? And then assess how much risk you are willing to take. This will influence the allocation in your entire investment portfolio.

2. Research and Educate Yourself

You should do detailed research on how the stock market works, including different types of stocks (e.g., growth stocks, value stocks and dividend stocks just to name a few). Also learn about various investment strategies (e.g., growth investing, value investing) and how they align with your goals. And don’t be afraid to go beyond the ASX, you may wish to consider international shares, such as in North America and Europe. Although investing in international companies comes with challenges, they may be worth it with the higher potential for returns. Just consider that the ASX 200 is flat since the GFC, but the US exchanges have gained 4 times since then. Even the nimble NZX has been a better performer.

3. Determine Asset Allocation

By the term ‘asset allocation’ we mean, the rough amount of the money you have to invest that will go to stocks generally, and from there which specific stocks you will ultimately choose. It is wise to diversify – in other words spread your investments across different assets (stocks, bonds, real estate) to reduce risk.

4. Select the Individual Stocks or other listed entities

Once you’ve done your research – which is a process in and of itself – then choose the stocks or other listed entities (i.e. REITs or ETFs). You should do it through a broker that has whatever you need to make decisions and trade – whether that be technical trading tools, or dedicated phone support. Don’t choose a broker just because it claims to be ‘free’, for two reasons. First, because you may get what you pay for. And second, you may end up paying anyway even when brokers purport to be free.

5. Monitor and Rebalance

So you’ve got your stocks. What now, do you just sit back and assume it will all go well? No. You should keep track of your portfolio’s performance and stay updated on market trends and news. When needed, adjust your portfolio to maintain your desired asset allocation and risk level.

Of course, this is not to say you should sell a company just because it had one bad trading day and/or one bad announcement. But you may need to reconsider if your investment thesis still holds in light of a particular bad announcement such as a profit downgrade. Is the bad news a one-off, or signs worse news could be coming, or that the company’s business model or competitive advantages are under threat. And beyond specific stocks, you should continue learning about investing and stay informed about economic and market conditions. With Google at our fingertips, there is no excuse for investors not to be informed.

5 further tips for investors

1. Start with What You Know. Invest in industries or sectors you understand or will find easy to understand. We’re not saying you have to be a qualified geologist to invest in resources companies, but you should understand the stage of life your company is at, why the commodities it prospects for are important as well as where commodity prices are at now and where they’ll be heading in the foreseeable future.

2. Keep a Long-Term Perspective. Stock investing is generally suited for long-term goals because it can take a number of years to generate spectacular returns. In the short-term there can be market volatility and this can dissuade some without patience from investing.

3. Invest regularly: Consider investing regularly (e.g., monthly) to spread out your investment over time and reduce the impact of market fluctuations.

4. Be aware of the risks involved in stock investing, including market volatility and potential losses.

5. Avoid Overconcentration. We cannot stress this enough, investors should diversify to avoid overexposure to any single stock or sector. This may not eliminate losses altogether, but will reduce the risk.

By following these steps and tips, you can build a well-structured stock portfolio that aligns with your financial objectives while managing risk appropriately.

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