Jul 21 2008
Building Your Stock Portfolio As An Investor
Are you looking to build a new stock portfolio as an investor? Or maybe, you already have managed investments, or a retirement plan and you are now looking to increase your investment portfolio? This article will help you build your stock portfolio in a way that will allow you to generate "real" wealth.
The availability of online trading and easy access to investing information has made life much more stress-free and less expensive for do-it-yourself investors. The World Wide Web has made the "trading" desk available to millions of households, and it is now possible and easy to buy and sell shares, options, warrants, interest rate securities and managed funds right from your very own home.
All that is required is a computer and an internet connection. In addition, you can now do your own research on a company or fund manager, as well as accessing stock brokers to ascertain what they are recommending to their clients. Most of this information is free or available at a reasonable cost ,and you can save yourself thousands of dollars in fees and commissions every year by using the internet. Rather than go through a full service stockbroker or investment advisor, it is now yet another avenue available in the do-it-yourself portfolio.
When you are wanting to build your own stock portfolio, there are some pitfalls you need to be aware of, and to avoid.
While you can find a mass of good information on stocks, you can also find very poor information. Many websites claim to have the latest hot picks or the top stock buys, and they often contradict each other. Who should you believe and, how do you identify the scams?
You will more often than not come across websites and chat rooms that give investment advice or tips about investments, but many of them are not qualified to do this. The information may be misleading and some websites have even been known to repeat incorrect rumors.
There is indisputable evidence that you cannot become rich by listening to the advice of others. As an investor you need raw information, not recommendations. You would not buy a house just by looking at it - nor should you buy a company’s stock without conducting your own research. There is no point trying to take control of your finances if you are going to rely solely on a tips from a newspaper, a website or an internet chat room. It is true that someone may know more about a particular company stock than you, but they could easily be wrong - so do your own research.
You need to be sure that your reasons for investing in a particular company are sound. Does the company have a well known name? Do you understand how the company operates? Do the products or services of the company stand a good chance of being in high demand over a 10, 20 or 30 year time frame? Does it have an innovative management team that moves with the times yet keeps a tight control on the company’s finances? Most of this information is available in a company’s Annual Report, but make sure that you take the information with a healthy degree of skepticism as most reports are written to promote the company.
Within the Annual Report, it is the financial statements, the balance sheet, the profit & loss statement and the cash flow statements that are the most important. This is because they will help you to assess if the company is providing value for money. You will be buying stocks at a certain price and you need to make sure that you are not paying excessively for them. The financial numbers give you a snapshot of the financial health, strength and growth rate of the company. This type of analysis is often called fundamental analysis, and also includes an analysis of the economy and other industries related to the company.
Remember that the historical and present prices of a stock hold significant clues to the future price. In practice, most analysts use fundamental analysis for short and long term buy/sell decisions and use technical analysis to confirm their findings.
Websites are a very good place to collect information about companies. Obviously, a company owned website will attempt to portray the company in the best light. Depending on how serious you are about investing, it is advisable to either visit or subscribe to investment research websites. Research websites are valuable tools for investors and provide company reviews, give general investing information, market updates, stock pickers, stock ratings, watch-lists, portfolio managers, charts, share indexes, newsletters, alerts and model portfolios. All the information that is vital to your own personal research.
So, how do you structure a stock portfolio to maximize your profits, ensure your security, give you total control of your investments, be easy for you to manage and give you satisfaction?
Here is a strategy that has been successful for many do-it-yourself investors:
1. Subscribe to a well respected investment research website one which is dedicated to analyzing financial information for investors. These are independent from the companies that they list, do not receive commissions or brokerage and rely solely on investor subscriptions for income. They have to give their subscribers quality information in order to to maintain subscriber confidence and, of course, subscribers.
2. Find the model portfolios that they have developed, and look for the methodology they have used to create and maintain each portfolio.
3. Read the research reports supplied for each stock, and study the graphs supplied that show price movements and trading volumes. Get a good understanding for both the long term and the short term trends of the stock.
4. Test each portfolio within a predetermined time period i.e., one month, one year etc. Depending on the website, you can set up each of the model portfolios in a free portfolio manager provided on the website with unlimited stocks. Set a starting date for the test period, where you "buy" stocks listed in the model portfolio at the closing price for that day. Make sure you include brokerage fees as this is part of the cost base for the stock. The website should either maintain up-to-date or 20 minute delayed stock prices, so a running balance can be maintained for the profit and loss of each stock over the designated period.
5. Compare each portfolio’s published results with the results that you have personally achieved in the portfolio manager. They should agree with each other when the same stocks are compared over the same time period. Your testing should allow you to develop a level of confidence in the model portfolio.
6. Determine the best model portfolio for you to use. You can do this using the last three months of stock price history, or perform a trial evaluation for the next three months of future prices. You can use one of the existing model portfolios or create your own personal portfolio from the stocks selected.
7. Subscribe to an online share broker website and begin trading.
8. Monitor stocks daily and review the performance of your actual portfolio against the model on a quarterly basis.
You should use caution and ensure you evaluate the methodology used by the research website to develop the model portfolios. These portfolios are designed by research firms to provide sensible medium-term portfolios that make it easy for investors and financial planners to replicate. You need to understand the research methodology and develop a level of confidence in it rather than just accepting the published results of each portfolio. You do not need to become an expert in methodologies.
Building a share portfolio that meets your investment objectives can substantially build your wealth over a time. You can also save money in commissions and fees, have peace of mind, total control over your investment and gain a real sense of satisfaction.
As a final word of caution, there is nothing sure in this world, except for death and taxes. Trading stocks is no different. Be prepared for some ups and downs, and don’t become emotionally attached to stocks: be ready to sell stocks to cut losses. If the base of your portfolio includes stocks that have strong capital growth and a fairly reasonable dividend, you should do well overall. In the words of Nike; "Just Do It!" and here’s to good investing!
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