Are you looking for ways to make your money work harder for you without incorporating too much risk? Building a diversified stock portfolio starts with understanding your risk versus reward tolerance. From there, you need to understand what fits into your portfolio and what may be a waste of money in the long run.
Here are seven tips for building a diversified stock portfolio.
1. Risk Versus Reward Tolerance
One of the best stock investment tips you can learn is how much risk and reward you’re willing to take on when it comes to your stock portfolio. The higher the risk, the higher the chance of reward. But this also goes vice versa.
Once you’ve determined how much risk you’re willing to associate with your stocks, you can start to incorporate different volatility levels. There are three levels, low, medium, and high. Low is the lowest risk and lowest volatility and high being the highest risk and high volatility.
A well-diversified portfolio will contain a mixture of all three. Only having low-risk stocks can lead to a less than stellar performance in the long run, but having too many high-volatility stocks may end up losing you money.
2. Long-Term Versus Short-Term
Consider whether you’re going to hold these stocks for the long-term or short-term. Investing in the long term means that you hold these stocks for at least a year or more. These are companies that you see constantly turning over high profits and increasing their audience.
Short-term will refer to the companies that you see as an opportunity to increase your profits and are fitting into a niche market. For instance, with the continued legalization of marijuana, you might invest in a few companies as they make killer profits and have little competition.
3. Look Into the Global Market
The United States isn’t the only place where companies exist. Europe, China, and Canada all have their own companies that may only operate in their respective countries.
The global market can be a great way to take advantage of the continued globalization. As economies like India and Brazil continue to expand, there is a chance to get in early and capitalize on companies that will do well beyond their borders.
4. Find Companies You Believe In
One key thing about diversifying your portfolio is to find companies that you believe in. Now, this doesn’t necessarily mean find the company that every person is talking about online, but more so a sector that you believe in.
People that invested early into solar power and other alternatives to energy are starting to reap the profits that have come from continued use of them. Rather than selling out early, they’ve stuck around and seen their value grow as these companies gained more traction.
Companies that you believe in are also easier to stomach when it comes to an economic downturn. If they have a sturdy enough foundation, they’ll be able to weather the storm and come back out on top and better than ever.
Companies like Amazon suffered through the dot-com bubble crash, where they fell under $10 a share in the late 1990s and again in the early 2000s.
If you had bought 5 shares of Amazon in 1997 for $7 each, you’d have 60 shares of Amazon worth around $3,450 each today. Totaling around $207,000.
5. Include Index Funds
Index funds are a great way to take some worry out of investing. These funds focus on the stock market as a whole, rather than focusing on one or two stocks that may or may not do well.
For example, say you invest into an S&P 500 Index Fund. If you buy one share of that fund, the fund then takes that money and splits it accordingly with the companies that make up the S&P 500. So a certain percentage would go into owning companies like Apple, Amazon, and Netflix.
You can even go broader and invest in an entire stock market fund. Rather than investing in only the companies that make up the S&P 500, you’re instead investing in the stock market as a whole and the companies that make up the entirety of it.
6. Consider Store of Value Like Gold and Cryptocurrency
You don’t want your portfolio to only contain stocks and bonds either. You’ll want to hold stores of value like gold or cryptocurrency. Like securities, these assets will fluctuate with the market and still have a real-life component attached to them, rather than only a share of a company.
For best results, you can buy real gold and keep it with you, as with Bitcoin. Though these run the same risks as keeping fiat money on you.
When it comes to assets it can be a little confusing on how to buy and sell them effectively. You can use this asset management model to help yourself plan a little better.
7. Utilize Dividend Stocks
The best stock investment strategies start as early as possible. This ensures the highest rate of return. This is done through the power of compound investing.
When you start early with dividend stocks and let those dividends get reinvested, you’re slowly building up more wealth. Then, when those dividends are reinvested, they can start to earn dividends in themselves.
So say you start with $100 at 20 years old and you don’t contribute anything else from then until you reach 70. Through compounding interest, your $100 would turn into anywhere from around $3,000 to upwards of $45,000. This was used with a range of anywhere from a 7% annual return up to a 13% annual return.
Build a Diversified Stock Portfolio With These Tips
Now that you know how to build a diversified stock portfolio, you start the process of investing. Don’t always take a lump sum and throw it at the stock market. Consider staggering your investments and if you need help, talk to a financial advisor so they can help you out.
If you want to learn more about how investing works, then be sure to check out the rest of the blog. Know someone interested in investing? Share this article with them so they know how to diversify their portfolio.