The advent of the Internet and proliferation of online brokerage firms has made it easy to invest in a wide variety of securities. While the mechanics of investing has gotten easier, developing a solid stock portfolio that meets your financial needs is still just as challenging as it has ever been. You can create and manage your stock portfolio by making a financial plan and using an investor's checklist to make sure you stay on track.
Make a budget. It's not as scary as it sounds. Create two columns. In the left column, list all of your income from all sources. List all of your regular monthly bills and expenses in the right column. Total both columns, then subtract your expenses from your income. Whatever is left over is your discretionary income. This is the amount of money you have available to save, invest or spend.
Develop a net worth sheet. Create two more columns. List all your assets in the left column. This is all the stuff you own, including your cash on hand, money in all of your bank accounts, cash value of your life insurance policies, the market value of any securities or other investments you own, your retirement accounts and the market value of your home and any other real estate you may own. List all of your liabilities -- that's all the stuff you owe -- in the right column. This will include all the money you owe on your mortgage, the total amount of any revolving debt such as credit cards, car loans, student loans, taxes due and any other debt you have. Total both columns, then subtract your liabilities from your assets. The remainder is your net worth.
Define where you want to be at a specific time in the future because you now know what your current financial situation looks like. This is your investment objective. You'll need to revisit your investment objective from time to time because it will change as you get closer to your retirement years. Early in your career, your investment objective might be aggressive growth. Since time is on your side, you might want to take a few risks with a portion of your stock portfolio. The closer you get to retirement, the more conservative your investment objective is likely to grow. Everyone's situation is different, so your goals will not look like your parents' goals or your neighbors' goals. Your age, income, investment temperament, aversion to risk and other factors will play a role in determining how you should invest your funds in order to best attain your financial goals.
Develop your initial stock portfolio using the investment pyramid concept. The base level of the pyramid, which is the largest percentage of your total portfolio, should consist of conservative, blue-chip stocks in companies that have proved their ability to perform well in both good and bad economic times. The next level, representing a smaller percentage of your total portfolio, should include growth stocks. The next level of the pyramid is for aggressive growth and international stocks. The top of the pyramid, and the smallest percentage of your portfolio, should be in speculative securities. There is no set formula for what specific percentage of your total portfolio each level should contain -- the percentages will change over time. The important thing is to make sure that you are comfortable with the percentages and level of risk involved.
Create a list of the stocks you currently own. Note the price you paid for each stock, the current market price and any dividends paid since you purchased them. Compare each stock's total performance to your investment objective. This will help you balance your portfolio by determining whether it is in your best interest to sell, hold or invested in additional shares of each stock.
Determine how much you are willing to lose on each stock in your portfolio. This will typically be a percentage of either the price you paid for the stock or its current market price. Set a stop-loss order in place with your broker for that price; for example, if you are willing to take up to a 10 percent loss and you purchased your stock for $50 per share, you would set your stop-loss order at $45. If the market price dipped down to $45 the order would execute. You would have a loss, but you have protected your portfolio from a potentially larger loss. As the price of the stock rises you may want to raise the stop-loss to protect your gains.
Create a daily stock portfolio checklist reflecting those items that are subject to daily fluctuation, such as stock price, dividend declarations or payments, positive or negative news about the company and changes in management or company policy. Your daily stock portfolio checklist should not take more than a few minutes to complete, but it will keep you aware of what's going on with your investments and help prepare you for any changes you may need to make to your portfolio.
- It's challenging to create a properly diversified stock portfolio without professional training and substantial assets. You can obtain the twin benefits of diversification and professional management by investing in a good quality mutual fund.
- All investments in the stock market involve some level of risk. Past performance is never a guarantee of future results. You may lose some or all of your investment.
- The stock market can be a volatile investment environment; you must be vigilant if you are going to manage your own stock portfolio.
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.