When I look at investing, I look at it from the point of view of getting my portfolio to grow from stock prices going up and earning dividends coming in. Additionally, I am always looking to minimize risk to the lowest possible level commensurate with growth.
With these two goals in mind, here is how I structure a stock portfolio.
1. Invest equal dollar amounts in each stock that you select. For example, ten stocks X $5000 per stock = a $50,000 stock portfolio. (If you are paying a percentage or an annual fee for your stock trades, it will not matter whether your $5000 purchases 36 shares or 100 shares.)
2. Diversify your portfolio by selecting stocks from different industries. This does not mean that semi-conductors, laptops, and software count as three different industries, and neither do banks, insurance and mortgage companies! Different industries look like this: consumer packaged goods, finance, education services, shipping services, retail clothing, technology, healthcare, oil, food, etc.
If you have more than eight stocks, I think it’s okay to have two in one industry, but resist the urge to buy a bunch of the industry du jour, because in a few months, the industry du jour will change, and you will be left holding the bag!
3. Buy different size companies along the growth and income spectrum: small, fast-growing companies; medium and large companies; huge companies with large dividends of 3-6% per year. Just as industries go in-and-out of favor in the stock market, so do blue chip companies vs. up-and-comers.
4. Stretch your comfort zone regarding price-per-share. If you NEVER buy stocks which cost over a certain price on the high side, such as $35, $75 or over $100, consider the fact that your arbitrary threshold might have no logical foundation. For example, if 85% of a famous company’s $125 stock is held by institutions, who is likely making the wise decision: the professonal money manager, or the novice stock portfolio hobbyist? Yes, yes, you are smart, especially at engineering or gourmet cooking or writing software. But you are not a mutual fund manager, and you’ve got to concede that mutual fund managers know a little more than you do about what kinds of stocks are likely to go up. So S-T-R-E-T-C-H. Do something new and get used to it. Then do something new again a few months from now.
Recommended
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Happy investing!
Crista Huff, Goodfellow, LLC
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