When I look at investing, I look at it from the point of view of getting my stock portfolio to grow via capital gains and dividend income. I’m always looking to minimize risk as well. From that point of view, here is how I would structure a stock portfolio.
1. Invest equal dollar amounts in each stock that you select. For example, ten stocks X $5000 per stock = a $50,000 stock portfolio. (If you are paying a percentage or an annual fee for your stock trades, it will not matter whether your $5000 purchases 36 shares or 100 shares.)
2. Diversify your portfolio by selecting stocks from different industries. This does not mean that semi-conductors, laptops, and software count as three different industries, and neither do banks, insurance and mortgage companies! Different industries look like this: consumer packaged goods, finance, education services, shipping services, retail clothing, technology, healthcare, oil, food, etc.
If you have more than eight stocks, I think it’s okay to have two in one industry, but resist the urge to buy a bunch of the industry du jour, because in a few months, the industry du jour will change, and you will be left holding the bag!
3. Buy different size companies along the growth and income spectrum: small, fast-growing companies; medium and large companies; huge companies with large dividends of 2-4% per year. Just as industries go in-and-out of favor in the stock market, so do blue chip companies vs. up-and-comers.
4. Stretch your comfort zone regarding price-per-share. If you NEVER buy stocks which cost over a certain price on the high side, such as $35, $75, or over $100, consider the fact that your arbitrary threshold might have no logical foundation. For example, if 85% of a famous company’s $125 stock is held by institutions, who is likely making the wise decision: the professional money managers, or the novice stock portfolio hobbyist? Yes, yes, you are smart, especially at engineering or gourmet cooking or writing software. But you are not a mutual fund manager, and you’ve got to concede that mutual fund managers know a little more than you do about what kinds of stocks are likely to go up. So S-T-R-E-T-C-H. Do something new and get used to it. Then do something new again a few months from now.
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