Making wise investments is a great way to create financial security for the future. To that end, many people make use of income that is not required to own and maintain an equitable standard of living to incrementally build a stock portfolio. When structured to complement the goals of the investor, the portfolio can result in a steady flow of revenue that will make the future very secure. If you are thinking of creating your first stock portfolio, here are some things you should keep in mind.
Assess your current financial condition. After meeting your monthly obligations and setting aside a small amount of resources in an emergency fund, how much do you have left to invest in stocks and other securities? Your goal is to make sure that you always add to the portfolio when and as you have the resources to do so and still provide for yourself and your family.
Determine your comfort level with making investments. Your general attitude may lend itself more toward options that carry a low rate of volatility and are therefore much safer. You may be a bit more adventurous and prefer to go with investment options that are riskier but also represent the opportunity for a greater return. Knowing your instincts can make a huge difference in how you choose securities and other investments for the portfolio.
Investigate the performance and background of an investment before making a purchase. You want to know all you can about the company issuing the stock or the entity offering the bond issue. Satisfy yourself that the investment is stable and has the potential to increase in value over time. Knowing the history, current status, and projected future performance of the investment will help you to avoid making a number of mistakes.
Buy only what you can afford. While brokers may urge you to buy on margin, don’t do this until you are more secure in your ability to select investments. Buying on margin is essentially buying on credit. If one or more of your investments perform poorly, you could quickly find yourself owning more money than you have invested.
Diversify the investments in your portfolio. Purchase different stocks that are associated with companies connected to different industries. When retail is going through a decline, manufacturing may be going through a prosperous period. Along with diversifying your stocks, include other investment types in your portfolio. Include a few municipal bonds, mutual funds and perhaps even some currency trading in your overall portfolio. Diversity helps to further protect you from declines that occur in a particular market.
Tips & Warnings
- Keep in mind that once you have created your initial stock portfolio, the contents are not set in stone. You are free to sell some of your holdings and purchase others if you wish to do so. Do have one or two stock options that you plan on keeping for the long term, as this helps to anchor your portfolio and provide you with some stability.
- Resist the urge to purchase more stock than you can afford, no matter how good the deal appears to be. If your hunch does not pay off, you can find yourself owing a great deal of money, and may have to use your portfolio to pay off the debt.