How to build a balanced Stock Portfolio?
Investing in the stock market is one of the best ways to grow your savings but you have to do it in the right way. That means that you need to have a well balanced portfolio. Many people are confused about just how to go about doing this and in reality most people have portfolios that are not well balanced. However it is a fairly simple matter if you know what you are doing.
The most important thing to building a balanced stock portfolio is to make sure that you are well diversified. That means that you need to have a number of different stocks, far more than most people have. The easy thing to do when you are investing is to just pick a few favorite stocks that you invest in, the problem is that this does not allow you to get the diversification that you need. Realistically you need to own at least twenty different stocks, which is a lot for most people but it is important to having a well balanced portfolio.
Of course there is little value to having all of your stocks in the same sector. This is one of the biggest mistakes that people make, they think they are well diversified because they own stock in twenty companies but all of the companies work in the same industry or closely related ones. In general stocks in the same industry move together so you want to make sure that you own stocks across a broad range of industries. This will reduce the risk of loss if one industry suffers a downturn.
Another key to building a balanced portfolio is to make sure that you have some of your money in growth stocks and some in stocks that are more stable. In general growth stocks are smaller companies that have lots of room to expand. The stocks in these companies can rise in value very quickly but they also come with a higher level of risk. Therefore you also want to make sure that some of your money is in larger more stable companies. The value won't grow as quickly but they are also far less likely to suffer large losses.
Most people find that it is very difficult to build a well balanced stock portfolio, mainly because they don't have enough money to invest. If you are going to own stock in twenty companies you are going to need to have quite a bit of money available. The easiest way to get around this problem is with exchange traded funds. These are similar to mutual funds except that they are traded like stocks. In most cases the fund is tied to one of the major stock indexes like the Dow. This provides a simple way to get a well balanced and properly diversified portfolio even if you only have a small amount to invest.