How to Build a Stock Portfolio

Though everyone knows someone who has struck it rich in the stock market, for the vast majority of investors, building a stock portfolio can be an intimidating and often herculean task. The stock market is risky, and researching hundreds or thousands of stocks to find the good ones is time-consuming and complicated. Also, today's winning stock pick may be a loser tomorrow. However, thorough research, proper diversification and a good asset allocation can help mitigate those risks.

Difficulty: Moderately Challenging

Instructions

1. Decide on an asset allocation. There are at least 10 major asset classes (growth and value stocks, large, small and micro cap stocks, international stocks, emerging market stocks, REITs, long and short term bonds), and you need to know which ones you want to own, and how much of each. You also need to know what percentage of your money you want in stocks and what percentage in bonds or other less risky investments. For instance, if you have $100,000, you may want to put 90% in stocks and 10% in bonds. Of that $90,000 you want to put in stocks, you may decide to put $20,000 in large cap growth stocks, $20,000 in small cap growth stocks, $10,000 in REITs, and the remaining $40,000 in international stocks. Make sure to read up on the risk profiles and benefits of each asset class to help you decide.

2. Research! There are literally thousands of websites like Yahoo! Finance and Morningstar (see links below) that analyze stocks, make predictions and give tips. If you are investing in individual stocks, make sure you thoroughly understand the fundamentals of each company before buying their stocks. If you want to cut risk by spreading your money out among many stocks, research mutual funds. Mutual funds are great for most investors because they allow even those with only a little money to buy the stocks of hundreds of companies simultaneously, thus decreasing risk. Not all mutual funds are created equal, though, so make sure you're buying funds that don't have a lot of unnecessary hidden fees. If you have only a small amount to invest, mutual funds may be the only way to achieve proper diversification and meet your asset allocation requirements. Mutual fund companies like Vanguard, T. Rowe Price, and Fidelity also have online tools to help you with your research.

3. Start buying stocks. Open a brokerage account and start fleshing out your asset allocation and diversification plan with the stocks or mutual funds you've chosen. Make sure you're not paying outrageous fees for each trade, since that can really eat into your returns. Also, instead of putting all of your money into the market in one day, do it gradually over the course of several weeks or months to take advantage of the natural dips of the market through dollar-cost averaging.

4. Rebalance. As time goes by, some of your holdings will outperform others, throwing your asset allocation out of balance. When you have new money to invest, use it to buy stocks in the asset classes that are underperforming, so that you maintain your desired asset allocation. Also, if one of your asset classes has truly taken off, consider selling some of those winners and re-investing the proceeds in an asset class that is lagging--the straggler may come out on top tomorrow.

Resources

• Yahoo! Finance
• Morningstar Financial Research
• Vanguard
• T. Rowe Price
• Fidelity

[tjzerrer]

on 6/28/2009 Everyone thinks just about US stocks. Thanks for the reminder of the other investment opportunities.