Stock Portfolio Selection Strategy
Many investors prefer to manage their own stock portfolios instead of owning mutual funds or other packaged products. Investing in individual stocks carries additional risks, but can be very rewarding financially. Individual stocks offer an opportunity to significantly outperform the market. A stock portfolio selection strategy should focus on finding the best buy candidates based on the trading method or system you use.
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Choose Investment Strategy
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Base your selection criteria on a specific investment strategy. It rarely pays to mix and match different investment styles because it takes a lot to master just one. Each strategy has a different set of selection criteria. For example, growth investors look for stocks that are growing sales and earnings faster than their peers; value investors look for undervalued stocks that they can buy "at a discount."
Refine Your Selection Criteria
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Once you've determined whether you are looking for growth, value or some other opportunity, define your selection criteria. Find out what the best performers in your category have in common and look for those traits in new buy candidates.
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Diversify Stocks, Not Styles
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Some investors want to have a portfolio that holds growth stocks, value stocks, large caps, small caps and so on. This approach is likely to produce disastrous results as you are not likely to be good at selecting stocks in all of those categories. Instead, diversify your holdings within the chosen category.
Always Consider the Downside
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Every stock comes with a risk. Your goal is to find stocks with more upside potential than downside risk to keep the odds in your favor. Sometimes you make more money just by losing less. It is therefore important to consider the downside of every potential buy candidate in order to determine whether the upside potential justifies the risk.
Use Charts to Time Your Purchases
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Once you've selected the best buy candidates for your portfolio, use charts to determine the best time to buy. When you buy is as important as what you buy. You may have to pass up on a strong candidate simply because it's the wrong time to buy it.
Have Sound Sell Rules
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Most investors focus on portfolio additions while neglecting deletions; yet deciding when to sell a stock is as (if not more) important as when to buy it. The Internet is brimming with buy lists and model portfolios for every occasion, but there are hardly any sell or avoid lists. You must have rules for what to do if a portfolio stock no longer meets your criteria or what to do if you are fully invested and find a better candidate.
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