What Kind of Stocks Should Be in a Portfolio?

Spreading exposure across different types of stocks can reduce risk in an investment portfolio.

Proper diversification can prevent an investment portfolio from having too much exposure to certain types of financial securities. This can benefit an investor when stocks are under pressure. Even if one group of stocks is declining, there is a chance another category will exhibit greater stability. Examples of portfolio diversification include stocks of different sizes, regions and industries. Ideally, a stock portfolio should contain undervalued stocks exiting a weak period and poised for a turnaround, although finding such companies can be challenging.

Types

Investors should build a stock portfolio that includes equities with different attributes. Growth stocks, for instance, should be a component in a stock portfolio, according to CNN Money. These are companies that have been growing earnings consistently. Growth companies should signal that the profits will continue and earnings results should exceed the performance in rival stocks. Investors can observe earnings forecasts and compare with competing businesses. Value stocks can also benefit a stock portfolio. These companies appear priced below their potential based on financial information leading to forecasts, such as profits and the value of assets owned.

Size

The size of a company is another factor to consider when creating a stock portfolio. Market capitalization is a standard way to measure the value and size of a business. Investors should consider incorporating large cap, mid cap and small cap stocks into a portfolio, according to CNN Money. Each category introduces a different level of risk and potential for growth, which makes diversifying reasonable. Small cap stocks tend to have the most risk and can trade with volatility, while large cap companies are often stable investments with moderate returns.

Region

A stock portfolio should not be limited to only U.S. investments, according to a 2010 article on the "USA Today" website. Instead, investors can gain exposure to different economies and conditions by allocating money overseas, which could complement the performance of domestic holdings. The global economic problems of 2008 and 2009 proved that worldwide financial markets can trade similarly, but there are still stock characteristics that are only available in international options. Investing in developing-market stocks, for instance, introduces greater risk into a stock portfolio, but also increases the possibility for higher profits.

Industry

Individual stocks from the same sector often trade in similar patterns, according to the Charles Schwab website. This is because stocks with competing business models are similarly affected by economic and market conditions. With the several different industries to choose from, individuals can benefit from investing based on familiarity, according the BSP Capital website. Technology stocks, for instance, are off limits to successful investor Warren Buffett, because he cannot relate to these companies.

References

• CNNMoney; Is My Stock Portfolio Truly Diversified?; Walter Updegrave; June 2011
• "USA Today"; International Stocks? Yes, There Is Some Value In Diversification; Matt Krantz; April 2010
• BSP Capital Limited: Keys To Warren Buffett's Methods
• Charles Schwab; Constructing A Diversified Stock Portfolio; Greg Forsythe; July 2008